FOLLOWING the release of the Financial Stability Review report for the first half of this year by the central bank this week, it is safe to say that it’s been a tough first six months for financial institutions.
The report notes that banks reported a “marked decline” in earnings from domestic banking activities during the first half of the year, weighed down by further margin compression and higher provisions for credit losses.
Ahead of a continuous challenging outlook, most lenders have so far this year not declared any dividends as they had in the past.
Banks are shoring up their buffers, either through new capital issuances or dividend reinvestment plans.
“Most banks have also reduced or deferred dividend payouts to shareholders, ” the central bank notes.
So will the financial year ending 2020 (FY20) pass by without any dividends for shareholders of banks?
Not necessarily, but the payouts will almost definitely be at the lower end of their respective dividend policies.
MIDF head of research Imran Yusof, who tracks the banking sector, says banks have understandably decided to refrain from declaring dividends so far this year, given the situation with the Covid-19 pandemic which has caused uncertainties within the business and operating environment.
Under normal circumstances, banks generally pay out dividends twice a year, mostly after they release their second quarter and fourth quarter financial results.
“We believe that it is to preserve capital, ” Imran says on why banks have not had any payouts this year.
However, even amid the current circumstances, he believes banks will likely give dividends.
“We expect it will be in the fourth quarter. However, it will most likely be at the lower range of their dividend policies, ” he tells StarBizWeek.
This is due to the cautiousness stemming from uncertainty surrounding banks’ asset quality, in particular post-loan moratorium.
“We opine that banks will likely want to retain more capital due to this uncertainty, especially as provisions might remain elevated until the first quarter of next year, ” adds Imran.
Danny Wong, fund manager at Areca Capital, (pic below) is also fairly confident that banks will declare dividends for FY20. In fact, it is precisely for this reason that he is holding on to his banking shares.
“Yes, the dividends have been deferred but I strongly believe investors and shareholders need dividends.
“I will add more (shares) on weakness as I expect the payouts to be cumulated and paid in the near future, ” he says. He thinks the payouts will be less this year “but not by much.”
Big banks like Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd surprised the market when they did not declare dividends in the recent second quarter of their fiscal years as they normally do.
To be sure, most, if not all, banking stocks have not done well so far this year in terms of price appreciation.
Maybank, for example, finished at RM7.21 as at Thursday’s close while CIMB was at RM3.05, both many folds below their one-year highs of RM8.86 and RM5.40, respectively.
Hence, not giving dividends to shareholders has been a double whammy of sorts.
Choosing to be conservative
While analysts and fund managers appear to be fairly confident about a payout in the near term, some banks are choosing to be more conservative in their projections.
CIMB, for instance, says that capital management and conservation remain a priority, and the board will make a decision at the year-end on the quantum of dividends – if any – depending on the operating conditions at that point in time.
In an e-mail to StarBizWeek, it says that visibility on the operational outlook for the rest of the year “remains low” at this juncture.
Nevertheless, according to the Financial Stability Review report, all banks remained well-capitalised throughout the first half of 2020, with aggregate capital buffers amounting to RM121.6bil as at June 2020, just a shade below the amount as at December 2019.
The report also says that the overseas operations of domestic banking groups also experienced a decline in profitability for the first half of 2020. This is because banks in the region were similarly affected by slower economic activity as a result of Covid-19 containment measures and a deterioration in asset quality.
However, Bank Negara notes that risks from the overseas operations are likely to be manageable, as banks’ overseas credit exposures to sectors directly affected by the pandemic are relatively small, ranging from 0.1%-5.3% of overall group exposures.
“Major overseas subsidiaries also continue to maintain relatively high levels of capital, which serve as strong buffers against potential credit losses.
“This will limit the need for capital support from the domestic parent banks, ” the central bank notes.
It adds that based on stress tests conducted by banks on their major overseas operations, most foreign subsidiaries have sufficient capital to withstand severe shocks amid the pandemic.
“Overseas operations of the domestic banking groups also continue to be largely funded by local currency deposits, with liquidity ratios remaining above local regulatory requirements and internal targets.”
In FY2019, Maybank paid out some RM7.19bil in dividends to its shareholders, which translated to 64 sen dividend per share, or a payout ratio of almost 88% of its net profit after the bank posted a record RM8.2bil in earnings.
Closest competitor CIMB gave shareholders a total dividend amounting to 26 sen per share or RM2.55bil, translating to a dividend payout ratio of 56% in FY19.
This year, those who have put their money into these banks and their counterparts will just have to wait a little longer to see if it’s been worth the wait.
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