Dividend payouts of D-SIBs likely affected
O ‘Important banks’ seen to maintain higher capital buffers but sector implication is minimal as they do not have to resort to raise additional equity capital
PETALING JAYA: Dividend payouts of domestic systemically important banks (D-SIB) could potentially be impacted to maintain higher capital buffers, according to Affin Hwang Capital.
BNM has designated Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and Public Bank Bhd, as D-SIBs, under a policy document issued on Wednesday. Under the framework, the applicable higher loss absorbency requirement for Maybank and CIMB are at 1% while Public Bank at 0.5% of risk-weighted assets (at consolidated level).
Affin Hwang believes that the sector implication is minimal and that these D-SIBs do not have to resort to raise additional equity capital, at current level. It said these banks already have sufficient CET1 capital level which are ahead of Basel 3 requirements and as such, do not need to raise additional equity capital unless their capital ratios dipped below the requirements set by BNM.
The research house maintained its neutral call on the banking sector, noting that earnings catalysts are lacking while loan growth may moderate further to 3% in 2020 due to lacklustre business and consumer sentiment.
“At this juncture, we foresee a contraction in sector core earnings per share of 1.8% year-on-year in 2020 and flat growth in 2021.”
MIDF Research said although the D-SIBs do not have to increase their capital further, the exiting high capital is a weight to return on equity (ROE). However, the other consequence in the increased capital is the reduction of risk relating to the solvency of the banks in general.
“While it is understood that there are only a few good alternatives to ROE as a measure for banks, we must be cognisant that this metric does not factor risk sufficiently. We believe that it needs to be considered with valuation as a whole and other factor such as asset quality, liquidity and asset growth should be evaluated together with ROE. We opine that this is the new normal environment that banks have to operate in. However, we must be aware that this equity is far less risky than what it was before.”
On a side note, MIDF opined that the novel coronavirus does not have a direct impact on the banking sector and any impact will be indirect and due to the possible disruption to trade and consumer spending patterns.
“However, we believe that it is too early to be overly concerned as it is still unclear on how long the outbreak will last. Nevertheless, we will monitor the situation accordingly.”
It also viewed that banking stocks in general are relatively undervalued as majority of the banks are trading below their three-year historical average.
“We believe that the recent price weakness is mostly sentiment driven associated with the coronavirus outbreak. The fact that the banks comply to even the additional D-SIB requirements suggest that banks will be able to withstand any major shocks. The banks have thus far managed to navigate the headwinds the sector faced and we believe will continue to do so.”
“Our top picks for this sector are banks with scale and size or the potential to maintain its earnings momentum. These are Maybank, CIMB and RHB Bank.”