Lower dividends from banks in the near term


MALAYSIAN banks are expected to offer a lower dividend payout for the upcoming first quarter amid a challenging operating environment.

The local banking sector has been seen as defensive high dividend plays but Kenanga Investment Bank Bhd analyst Ahmad Ramzani Ramli said economic slowdown and the risk of deteriorating asset quality could see banks having a hard time to deliver the same payout as in 2019.

“Earnings will be volatile as impairment allowances likely to be volatile underpinned by a moderate/ slow credit demand.

“The (recent) stimulus package is not enough and what is needed is a fiscal stimulus to support credit demand and business confidence.

“Until then, banking performance will be muted with a dividend unlikely to be repeated as it was in 2019,” he told The Malaysian Reserve (TMR) recently.

Last Friday, RAM Rating Services Bhd (RAM Ratings) said it had observed a trend of higher dividend payouts by banks in the country during the latest round of financial results.

The rating agency said this was the scenario against the backdrop of a cloudy outlook on loan growth and build-up of excess capital, and added that banks’ capital positions are envisaged to remain solid after their dividend payments.

Financial Institution Ratings co-head Wong Yin Ching said the Malaysian banking sector wrapped up 2019 with a muted 3.9% loan expansion — a multi-year low.

“Already having had to contend with the US-China trade tensions and anaemic global growth, the global Covid-19 outbreak and domestic political uncertainties are expected to further constrict credit demand.

“For 2020, loan growth is likely to clock in below that of 2019,” she said in a statement.

Ahmad Ramzani concurred with RAM Ratings’ observations on the higher dividend payouts by banks for last year’s fourth quarter.

“The banks’ common equity tier-1 and capital ratio are above regulatory reserves. Loan growth is moderate and asset quality is still resilient with no sign of major deterioration.

“Hence, excess/surplus capital is not needed and readily available. What better way to reward shareholders by giving them higher dividends?” he said.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Yusof observed a similar trend in bank dividends in the latest financial results announcements.

“We observed banks’ have gravitated towards declaring a higher portion of cash dividends as opposed to retaining some capital through dividend reinvestment plans (DRP).

“We believe this is due to the fact that banks have built up their capital position to a strong level and well above the requirements set by Bank Negara Malaysia.

“Hence, it does not have to retain as much capital as before. Also, by paying out more dividends, banks can also manage their return-onequity better,” he told TMR.

Imran Yassin added that the firm is cognisant of the headwinds the banks will be facing from this year.

While he expects net interest margin compression to come from the Overnight Policy Rate cuts and pressure to banks’ interest income, non-interest income (NOII) will moderate the loss.

“This is due to the fact that we expect similar trends from last year where banks’ saw strong NOII growth stemming from treasury activities,” he said.

Imran noted that asset quality will also face some pressure which should affect provisions level.

“There could be some leeway on the treatment of restructured and rescheduled accounts. We do expect banks’ earnings to be stable this year. With this and the fact that banks’ capital position remains solid, we expect banks’ dividend for this year to at least match that of last year,” he said.

He said banks’ will continue to look at all cash dividends which should enhance their appeal and moderate any downside risk to share prices.

Hong Leong Investment Bank Bhd research analyst Chan Jit Hoong said banks have been dishing out higher dividend payouts.

“In a muted growth environment, maybe banks are thinking along the lines whereby it is better to offer more dividends to shareholders. No point hoarding cash at this juncture. Their capital ratios remain robust,” he told TMR.

Chan noted that banks usually do not pay dividends in the first quarter (1Q), but will only do it in 2Q and 4Q.

“Malayan Banking Bhd, for example, dished out some 88% of dividends in cash. This is extraordinary as they typically run rate is only circa 78% with DRP in place. Before DRP, they were only doing circa 60% payout in cash,” he said.

Chan added that it will continue to be a tough operating environment for banks, especially in a rate cut environment.

Even with the stimulus package in place, he believes it is hard to spur both consumer and business sentiment at this juncture.