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Slowing economy and flat earnings turn banks into yield plays

Goola Warden
Goola Warden11/8/2019 6:30 AM GMT+08  • 5 min read
Slowing economy and flat earnings turn banks into yield plays
(Nov 11): Amid a slowing economy, banks are being increasingly looked upon as yield plays. A Goldman Sachs report last month said real estate investment trusts had outperformed the Singapore MSCI Index by 16% so far this year, owing to the sustainability
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(Nov 11): Amid a slowing economy, banks are being increasingly looked upon as yield plays. A Goldman Sachs report last month said real estate investment trusts had outperformed the Singapore MSCI Index by 16% so far this year, owing to the sustainability and predictability of distributions. “Banks now yield 5% (based on Goldman’s forecast for FY2020) and there is scope for up to 4% dividend per share growth annually,” the report says.

For instance, Oversea-Chinese Banking Corp’s common equity tier 1 ratio grew more than its risk-weighted assets (RWAs). If this continues, the bank will be accumulating excess capital, which it can pay its shareholders. In 1HFY2019, OCBC’s dividend payout ratio was just 43.47%. Goldman reckons OCBC has the potential to raise this figure to 60%.

By the numbers, CET1 grew 1.9% q-o-q even though OCBC’s retained earnings was flat q-o-q. This is because its scrip dividend raked in some $843 million, according to OCBC CFO Darren Tan. OCBC’s ordinary share capital rose $865 million to $17.3 billion as at Sept 30, from $16.4 billion as at June 30. In the meantime, loan growth was flat q-o-q at $263 billion. Thus, RWA grew just 1.7%. As a result, OCBC’s CET1 ratio remained unchanged q-o-q at 14.4%, the highest among the three local banks.

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