The MAS wants Singapore banks to cut their dividends. What does it mean for investors?

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On July 29, 2020, the Monetary Authority of Singapore (MAS) released a statement recommending that Singapore banks (i.e. DBS, OCBC, and UOB ) cap their FY2020 dividend per share at 60 per cent of their FY2019 amount.

In addition, it also recommended that the banks offer shareholders the option to receive their dividend in the form of shares instead of cash (a scrip dividend).

The reason for this move is to ensure that Singapore banks conserve enough cash and retain ample liquidity as we navigate the economic uncertainties ahead due to Covid-19.

Now, if you are concerned about the financial strength of Singapore banks due to this statement, let me assure you that they remain among the most well-capitalised banks in the world.

A common ratio to measure a bank’s financial strength is the Common Equity Tier 1 (CET1) ratio which measures a bank’s CET1 capital against its total risk weighted assets. The higher the ratio, the stronger a bank’s financial position.

This ratio was adopted as part of the Basel III Accord on bank regulations in wake of the 2008 financial crisis. Basel III requires that banks must have a minimum CET1 ratio of 4.5 per cent. In Singapore, the MAS requires that banks must have a minimum CET1 ratio of 6.5 per cent .

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As of March 31, 2020, the CET1 ratios of DBS, OCBC, and UOB are 13.9 per cent, 14.3 per cent, and 14.1 per cent respectively – which is higher than ICBC, the largest bank in the world (13.2 per cent) and JP Morgan Chase, the largest American bank (11.5 per cent).

Despite their strength, the MAS is erring on the side of conservatism due to the potentially long drawn out effects of Covid-19 as the Singapore banks are a key pillar of the Singapore economy.

Central banks around the world – including the US, UK , EU, and China – have also advised banks to cut/suspend dividends due to the pandemic. One outlier? Malaysia , which has yet to issue any guidance on dividends so far.

What does it mean for investors?

While the MAS announcement is purely a recommendation, the Singapore banks are expected to follow suit. (If your boss gives you a hint, you listen.)

So how does a dividend cut and scrip dividend affect you as a shareholder? Here are three things to consider:

1. Forward dividend yield will drop.

This one is quite clearly obvious. With FY2020 dividends capped at 60 per cent of FY2019’s, your forward yield will fall:

Bank FY2019 Dividend Per Share Current Yield* FY2020 Dividend Per Share (60 per cent Cap) Forward Yield*
DBS 123.0 cents 6.3 per cent 73.8 cents** 3.8 per cent
OCBC 53.0 cents 6.2 per cent 31.8 cents 3.7 per cent
UOB 130.0 cents^ 6.8 per cent 78.0 cents 4.1 per cent

*Based on closing share prices as at August 4, 2020. **Cap applies from Q2 2020 to Q1 2021 for DBS. ^Includes special dividend of 20 cents; UOB has paid a special dividend eight out of the last 10 years.

Because of this, some investors chose not to stick around and decided to sell their stocks which saw Singapore bank share prices fall 3-5 per cent after news of the announcement.

The MAS hasn’t given any guidance beyond FY2020, so whether this dividend cap will remain beyond this year is anyone’s guess at this moment and largely based on how the post-pandemic situation develops.

2. Scrip dividends are optional.

Shareholders have to fill up a Notice of Election to opt to receive a scrip dividend. If you do nothing, you will receive your dividend in cash as usual.

In general, we prefer receiving our dividends in cash as it gives us more flexibility when it comes to redeploying our capital in other investments.

However, a scrip dividend is useful if you intend to own more shares for the long term as you avoid trading fees and commissions. A slight discount may also be applied to the issue price of shares under a scrip dividend.

3. Odd lots.

In Singapore, the standard lot size is 100 shares . Because it is unlikely that your total scrip dividend amount will precisely equal 100 shares, you will end up with an odd lot of shares if you opt for a scrip dividend. In general, investors dislike odd lots as they fetch slightly lower prices in the market due to their lower liquidity.

This matters less if you plan to hold onto a stock for the long term as shares from multiple scrip dividends will eventually snowball into full lots. But if you don’t like the hassle of odd lots, then stick to cash dividends.

The fifth perspective

As an investor of all three Singapore banks myself, I’m happy to hold onto my positions as I plan to own them for the long term. The banks are stable, well-capitalised, and I stand to earn a higher yield when the dividend cap is eventually lifted. Prices are also not attractive enough for me to consider selling my shares anyway.

In the meantime, I’ll continue to receive my dividends. In cash, of course.

This article was first published in The Fifth PersonDisclaimer: All content is displayed for general information purposes only and does not constitute professional financial advice.