SINGAPORE (Nov 19): At a time of rising market volatility, dividend growth investing could offer shelter from the storm. For this, look no further than the local banks. They may not offer the highest yields, but their dividends are likely to continue to grow. All three have staked out slightly different growth strategies and are anticipating modest loan growth, firm net interest margins (NIMs) and continued wealth management traction in the coming years.

The trio announced 3QFY2018 earnings that were more or less within analysts’ expectations. The standout was the four-basis- point q-o-q rise in the common equity tier 1 (CET1) capital adequacy ratio (CAR) of Oversea-Chinese Banking Corp to 13.6%, the only bank to register CET1 growth in the third quarter.

The reason for the rise was twofold. First, the banking group’s risk-weighted assets (RWA) were stable at $200.3 million despite strong loan growth of 1.7% q-o-q and 10% y-o-y to $257 billion. This is probably because the loans disbursed by OCBC carried lower risk weights, that is, they were well collateralised (such as mortgages) to customers with good credit ratings. The RWA of the other two banks rose, causing their CET1 CAR to fall.

https://s3-ap-southeast-1.amazonaws.com/tesuploads/849/Cap%20pg%2026%20Chart%201.png

OCBC was also the only bank to register higher shareholder equity, another component of CET1 CAR. This is due to its scrip dividend. In past years, the take-up rate of OCBC’s scrip dividend was high — 70% to 80% — because the bank offers a generous discount of 10%. OCBC declared an interim dividend of $837 million (20 cents per share) translating into a (cash) dividend payout ratio of 36%. The value of the group’s ordinary shares rose by $667 million to $15.76 billion as at Sept 30, suggesting that the take-up rate for the scrip dividend was around 79%. The ex-dividend date was Aug 15, and payment date was Oct 8.

At a recent results briefing, OCBC CFO Darren Tan said, “We expect the [dividend] quantum to continue to rise in tandem with the overall performance of the bank. A payout ratio of 40% to 50% continues to be our guidance.”

CEO Samuel Tsien has guided for loan growth to be in the mid- to high-single digits for FY2019. “It will not be as high as 2018,” he says, referring to estimated loan growth of 10% for this year. “There is no significant deterioration in our portfolio, and in a normalised cycle we should be seeing higher provision levels, but in the range we have indicated.” For 3QFY2018, OCBC’s credit costs stood at 14bps. Tsien says normalised credit costs are likely to be in the 12bps-to-15bps range. “Overall, credit cost is expected to rise to long-term average levels in 2019, but potential offshore and marine recoveries could keep them below,” states a Nov 12 Credit Suisse report, referring to all three local banks.

For 3QFY2018, OCBC’s net profit rose 3% q-o-q and 12% y-o-y to $1.245 billion. Net interest income rose 4% q-o-q and 9% y-o-y to $1.505 billion, as NIMs rose 5bps q-o-q and 6bps y-o-y to 1.72%. Assets under management for Bank of Singapore, OCBC’s private arm, rose 3% q-o-q and 11% y-o-y to US$105 billion ($144.7 billion). The growth is due to net new money, Tsien indicates, as financial markets had a volatile 3QCY2018. The source of highest growth of AUM continues to be Greater China, he adds.

While a full-blown trade war between China and the US will slow growth across Asia, Tsien believes the Greater Bay Area initiative by the Chinese government “is a very good defence against a slowdown”.

In a recent report, UOB Kay Hian says it prefers OCBC because of its ability to raise dividends. “OCBC is expected to play catch-up in NIM expansion and improve its dividend payout. CET1 CAR could further improve as OCBC implements an internal ratings-based approach to compute risk-weighted assets for OCBC Wing Hang in 2019/20,” the report says. IRBA will lower RWA because of efficiencies that subsidiary OCBC Wing Hang’s current approach does not provide. “OCBC could increase dividend payout ratio towards mid-40%, bringing forecast dividend per share for 2019 to 48 cents,” the UOB Kay Hian report adds.

Strong capital position, continued regionalisation for UOB

United Overseas Bank has the highest CET1 CAR, 14.1%, as at Sept 30. But, the ratio fell 4bps q-o-q, owing to higher RWA caused by asset growth. Its shareholder equity fell to $7.06 billion because of the redemption of $847 million of perpetual securities. On the other hand, retained earnings continued to grow despite an interim dividend payout of $855 million during the third quarter. There was a marginal decline in CET1 capital, to $29.9 billion, compared with a $6.8 billion q-o-q rise in RWA to $212.5 billion. This was due to a 2% q-o-q and 9% y-o-y growth in loans to $252 billion.

In August, UOB announced that its dividend policy is to maintain a dividend payout ratio of 50%, subject to a minimum CET1 CAR of 13.5% and sustainable financial performance. For 1HFY2018, UOB dividend payments translated into a payout ratio of just 41.6%, higher than OCBC’s payout ratio but lower than DBS Group Holdings’. UOB is likely to maintain a dividend of at least 50 cent per share for the second half. At its current price, this translates into a yield of 4.1%. UOB bank paid out $1.66 billion in dividends for FY2017, representing a payout ratio of 49%.

UOB’s 3QFY2018 net profit stood at $1.04 billion, down 4% q-o-q but up 17% y-o-y. The q-o-q decline was largely due to a 19% decline in trading income, which the bank blamed on “lower gains from structural foreign exchange positions”. Credit costs on impaired loans were flat, at 15bps, and higher for non-impaired loans, causing total credit costs to rise 5bps q-o-q to 18bps. This is higher than OCBC’s 14bps but lower than DBS’s 21bps.

UOB has the lowest loan-to-deposit ratio of 85.7%, flat q-o-q and y-o-y. Deposits rose 2.1% q-o-q and 9.7% y-o-y to $294 billion, pressuring the bank’s NIMs, which fell 2bps q-o-q to 1.81%. UOB says it would like to “leverage its strong capital position to drive loan growth on the back of the rising interest rate environment”. It is rolling out a digital bank in Vietnam, Thailand, Malaysia and Indonesia, the Asean countries in which it has a presence.

DBS has most generous dividends

For 1HFY2018, DBS gave shareholders a dividend of 60 cents per share, up 82% y-o-y. The payout of $1.538 billion translates into a payout ratio of 54% versus its 1HFY2018 net profit $2.845 billion. DBS’s dividends translate into a yield of 5.17%, which is as good as some large real estate investment trusts. Furthermore, DBS promises growth.

It is of no surprise then that JPMorgan has DBS as its top pick. “DBS is one of our highest-conviction picks across Asia banks. The stock offers a combination of tech savvy, revenue beta, cost discipline, high yield and relatively undemanding valuations, which sets it up for continued outperformance over the next 12 to 18 months,” the US bank says. “Our investment case for the stock rests on ROE [return on equity] improvement coming from capital management (special dividend and dividend per share of $1.20 a year) and earnings momentum,” it adds. JPMorgan estimates an 8% compound annual growth rate in pre-provisioning profit and a 16% earnings per share CAGR for 2017 to 2020. “The decision to lever up by way of special and higher recurring dividend is an immediate catalyst for these multi-decadehigh returns,” the US bank says. DBS’s 3QFY2018 net profit rose 72% y-o-y and 3% q-o-q to $1.413 billion. Although specific provisions were down sharply to $225 million from the year-ago level of $1.655 billion, DBS’s credit cost at 21bps was the highest among the three banks. “Credit risk management has not exactly been a forte, but cyclical improvements lay those concerns to rest for now, in our view. The recent NPL (non-performing loan) cycle has demonstrated that the bank has been able to generate risk-adjusted returns despite taking on these risks,” notes JPMorgan.

According to RHB Securities, the trade war between the US and China could slow DBS’s loan growth more than its peers’. However, it should be the biggest beneficiary of the US Federal Reserve’s current interest rate hike cycle, as its earnings will improve the most from every 1bp rise in the Singapore Interbank Offered Rate, RHB adds. “We believe the rise in the Sibor could offset the negatives [for DBS],” RHB says.

According to Moody’s Investors Service, the local banks should be able to maintain their dividends because of strong capitalisation, stable asset quality and ample liquidity to support loan growth based on the local banks’ loan-to-deposit ratios and net stable funding ratios. “

Core capital ratios at DBS and UOB declined from the previous quarter, owing to increased dividend payouts for 2017, but they remain strong, as did OCBC’s capitalisation, which improved modestly,” Moody’s says, following the announcements of the banks’ third-quarter results. “We expect loan growth at the three banks to moderate to about 5% in 2019. At this pace of loan growth, retained earnings will be more than sufficient for the banks to maintain ample capital buffers.” The banks’ internal capital generation will outpace capital consumption as loan growth slows amid increased macro uncertainty in Singapore and overseas, Moody’s indicates.

Credit Suisse says UOB is now its top pick, following 3QFY2018 results, based on capital strength, NIM trends and asset quality. “We believe there is scope for the group to review its dividend payout ratio, and should the group decide on a 50% payout (which is at the high end of its policy of 40% to 50%), the dividend could amount to 57 cents, or a 5.3% yield.”

Local banks still offer yield plus growth despite global headwinds 

Will the Rising Sun keep rising?

Local banks still offer yield plus growth despite global headwinds

Related News

Highlights

Will the Rising Sun keep rising?

Related News

China’s markets still have genuine potential despite soured sentiments

Ray Dalio says he doesn't want to hold bonds, cash ‘is good’

Retail and tourism recovery inspires RHB to pick DFI Retail and CDL Hospitality Trusts