D-SIBs don’t need to raise extra capital, but may pay lower dividends

These banks already have sufficient CET1 capital levels, which are ahead of Basel 3 requirements, says analyst


MALAYAN Banking Bhd (Maybank), CIMB Group Holdings Bhd and Public Bank Bhd, the country’s first Domestic Systemically Important Banks (D-SIBs), are not expected to raise extra capital despite the higher capital requirements for D-SIBs.

The three lenders, identified as D-SIBs by Bank Negara Malaysia (BNM), have to maintain higher capital buffers to absorb losses, so as to protect the domestic economy.

Affin Hwang Investment Bank Bhd (Affin Hwang Capital) analyst Tan Ei Leen said these banks already have sufficient Common Equity Tier 1 (CET1) capital levels, which are ahead of Basel 3 requirements.

“We believe the sector implication is minimal and that these D-SIBs do not have to resort to raise additional equity capital, at current level,” Tan wrote in a note yesterday.

She said as at Sept 30, 2019, Maybank had a CET1 ratio of 14.4%, while CIMB’s was at 13.1% and Public Bank’s at 13.1%. The Basel 3 regulatory requirement stands at 7%.

D-SIBs refer to banks whose distress or failure could potentially cause considerable disruption to the domestic financial system and the wider economy.

As such, BNM in a statement on Monday said the D-SIBs would need to maintain higher capital buffers — at the consolidated level — to meet a higher loss absorbency (HLA) requirement.

This serves to increase a D-SIB’s capacity to absorb losses, therefore reducing its probability of distress or failure during periods of stress, which would in turn make for a safer and more resilient domestic financial system.

“Nonetheless, the ability of these D-SIBs to pay higher dividends could potentially be constrained by this requirement,” Tan added.

Public Bank, known for its consistency in paying higher dividends over the years, paid a total dividend of 69 sen for the financial year ended Dec 31, 2018 (FY18), with a total dividend payout of RM2.68 billion and a dividend payout ratio of 47.9%. Dividend yield was at 2.8%.

Maybank paid a 57 sen dividend in FY18, bringing the total dividend payout to RM6.3 billion or 77.3% of net profit. Dividend yield stood at 6%.

CIMB paid a dividend of 25 sen in the same year, with a 50.8% dividend payout ratio while total payout stood at RM2.37 billion.

Maybank and CIMB have been identified to be under the Bucket 2 category of D-SIBs, whereby their HLA requirement stands at 1% of their risk-weighted assets.

Meanwhile, Public Bank, under the Bucket 1 category, is required to allocate 0.5% of its risk-weighted assets.

BNM said the HLA requirement for these lenders will come into effect on Jan 31, 2021.

Affin Hwang Capital 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.

The firm foresees a contraction in sector core earnings per share of 1.8% year-on-year (YoY) in 2020 estimates and flat growth in 2021 estimates.

It has a ‘Hold’ recommendation on Maybank, CIMB and Public Bank, with target prices of RM8.36, RM4.98 and RM18 respectively.

The banks are expected to report their earnings for the fourth quarter ended Dec 31, 2019 and FY19 by the end of this month.

Public Bank rose 40 sen or 2.22% to RM18.40 at 5pm yesterday, more than double the country’s benchmark index.

Maybank closed nine sen or 1.08% higher at RM8.45, while CIMB ended the day up four sen or 0.8% at RM5.02.

The combined market capitalisation of the D-SIBs amounted to RM216.23 billion.

Meanwhile, the Bursa Malaysia Finance Index increased 1.16% to 14,849.14 yesterday, the biggest move since rising 1.7% on Dec 18, 2019.

The FTSE Bursa Malaysia KLCI climbed 1.04% or 15.98 to 1,552.77, also the biggest increase since jumping 1.41% on Dec 18, 2019.