Thoughts on Singapore Banks’ Dividend Cut

Having written quite a number of times on Singapore Banks, I received numerous request from readers to share my thoughts on the recent move by MAS, calling upon Singapore Banks to cap their total dividends at 60% of the amount in the previous financial year, I have decided to share my thoughts here. To read the full article, you can find it here.

COVID-19 Pandemic

In light of the COVID-19 Pandemic, the effects of the virus has resulted in many businesses shutting. As Singapore has lifted the lockdown restrictions, having a walk down Orchard Road, one would notice numerous shops in the malls gone. With many expecting a vaccine to only be ready by end of the year and government subsidies ending, this would just mean that more businesses will probably have to make the tough decision to shut down and cut their losses.

To quote DBS CEO, Piyush Gupta – this COVID-19 Pandemic is the worst downturn Singapore has ever faced since our independence in 1965.

DBS has taken quite some extreme assumptions around the number of SMEs that will be unable to survive this pandemic with its internal stress testing and has warned that the NPLs (non-performing loans) ratio could be worst than the levels seen during the Global Financial Crisis. Furthermore, there will definitely be more stress on the financial systems as we move onto the later part of this year and the next year, as many of these bankruptcies have yet to filter into through the financial system. This in part have been due to Government policies, such as the deferment of mortgages, rents and wage subsidies.

A Need To Worry?

With this cut in dividends, MAS is just following in the footsteps of the ECB by ensuring that the banks have sufficient capital to weather through this storm. However, MAS is mindful of the many Singaporeans who depend on the dividends of our Singapore Banks for passive income; hence, they have only called upon the banks to slash dividends by 40%. This would mean the dividend yields of our 3 local banks will be in the region of 3-4%, which is still fairly decent.

Should we be panicking?

While this might send a very bearish tone to the economy; however, I do not think there is a need to panic. If we look at our banks’ capital ratios, which measures the banks’ capital in relation to its risk weighted assets and current liabilities, it has been improving over the years. Currently, the Singapore Banks have a CET1 Capital Ratio of above 14%, well above the regulatory requirements set by the Basel III Standards and MAS. Furthermore, the Singapore Banks CET1 Capital Ratio is even higher than the Tier 1 Capital Ratio during the Global Financial Crisis, where the CET1 Capital Ratio, which is more stringent, was yet to be introduced.

Ultimately, while this might not be a popular move to slash dividends, it is a financially sound move to ensure that our banks have sufficient capital. Furthermore, when it comes to investing, we should always be asking ourselves if we are investing for the short or long-term. In the long-term, I am fairly certain that our Singapore Banks will be able to weather through this crisis, as they have with the many previous crises.

Hence, does this change my original investment thesis for the Singapore Banks? My answer is a firm NO!

The information provided by InvestingNook serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

Disclaimer: The Author has vested interest in OCBC & UOB at the time of writing.