This article first appeared in The Edge Malaysia Weekly on April 6, 2020 - April 12, 2020

BANK dividends came into focus last week after major UK lenders, including HSBC, Barclays and Royal Bank of Scotland, caved in to regulatory pressure and agreed to halt dividends and buybacks this year, while also cancelling outstanding 2019 dividends, in a bid to preserve capital amid the Covid-19 crisis.

The UK banks’ move follows that of European banks a week earlier. In the UK, the Bank of England also expects lenders to axe bonuses to senior executives this year.

These moves have prompted the question as to whether banks in Asia, including Malaysia, may be the next to have to do so, as the economic fallout from the coronavirus outbreak deepens.

A check with the country’s largest bank by assets, Malayan Banking Bhd, reveals that it has no plan to scrap its dividend payouts to shareholders.

“Maybank will honour the payment of its second interim dividend of 39 sen per share for FY2019, which is due on May 6. The group wishes to reiterate that it has robust capital and liquidity positions, which enable it to honour this commitment to its shareholders,” its president and CEO Datuk Abdul Farid Alias tells The Edge.

“On the payment of dividends in the future, Maybank intends to maintain its dividend payout ratio policy of 40% to 60% of Patami (profit after tax and minority interests).”

Maybank had initially proposed the 39 sen cash payout as a final dividend for FY2019, which was to have been approved by shareholders at its upcoming annual general meeting. However, since the date of the AGM remains uncertain due to the virus, it recently reclassified it as a second interim cash dividend.

As for bonuses, Abdul Farid says it will all depend on how the company itself performs. “At Maybank, bonuses (aside from contractual ones to specific categories of employees), are discretionary and dependent on the overall performance of the company and the individual employee. We do not foresee any change to this practice.”

He adds that he does not expect Maybank’s top line to be significantly hit this year despite the six-month moratorium on loan repayments that banks are offering retail and small and medium enterprise (SME) borrowers.

“We do not foresee our top line to be significantly impacted as a result of the moratorium, as interest or profit rate will still be recognised as revenue. What the bank has decided to do is to not charge interest on interest (or compounding of interest) during the moratorium, for eligible individuals and SMEs at this difficult time. The impact of this is expected to be minimal,” says Abdul Farid.

Banks typically pay dividends as a means to reward shareholders and use up excess profits, but they can also choose not to if they want to preserve their capital levels.

“It’s too early to comment on whether we will axe dividends. Normally, dividends depend on profitability, capital and economic outlook. It’s an item that we need to deliberate with the board, and at the moment, we are not discussing it yet,” the CEO of a local bank shares.

He also points out that Bank Negara Malaysia will have to approve any dividend that is proposed by banks.

Some analysts say that with banks already among the sectors taking the worst hit in stock markets now, shareholders will be counting on dividends more than ever to keep holding on to the stocks.

Nevertheless, it is already anticipated that dividends, if any, will be lower, given that the banks’ earnings will be impacted by a significantly slower economy this year, and by the slew of relief measures to support borrowers. Bank Negara expects Malaysia’s economic growth to come in at between -2% and 0.5% this year, after 4.3% last year.

“I do not think it is going to reach a point where banks stop paying dividends completely unless they go into a position of loss, which is not something we anticipate,” a banking analyst says, pointing out that Malaysian banks are in a strong capital position.

Last Wednesday, shares of UK banks fell sharply after they announced plans to scrap dividends.

“We do not expect the capital preserved to be needed by the banks in order to maintain adequate capital positions, but the extra headroom should help the banks support the economy through 2020,” the Bank of England’s Prudential Regulatory Authority said.

Over in Europe, the European Central Bank asked banks to skip dividend payments and share buybacks until at least October, and use their profits to support the economy.

Worst-case scenario

Malaysian banks are, nevertheless, entering a period of turmoil from a position of strength. Their capital ratios are a lot higher than during the 2008/09 global financial crisis (GFC), while asset quality is much better.

However, loan growth is way more subdued and margins are a lot thinner. Bank Negara has already cut the overnight policy rate (OPR) twice this year, by 50 basis points (bps) in total, to 2.5%.

“Our possible worst-case scenario [for the industry] assumes that the OPR is cut four times this year, that is by 100bps (-50bps year to date) to 2%; domestic loan growth is flat year on year, assuming a loan-to-GDP growth multiplier of one time; and that credit costs spike to post-GFC highs. The latter has the largest impact on earnings [as] the current credit cost levels of most banks are nowhere near the peak of the post-GFC period,” says Maybank Investment Bank Research in a March 29 report.

“All in, we estimate a 23% to 49% cut in our net profit estimates, along with a decline in average return on equity to 4.8% to 9%, from 6.7% to 12.2% before,” it adds.

CGS-CIMB Research expects the six-month moratorium on repayments to somewhat ease the pressure on banks’ asset quality in the second and third quarters of this year “as there would be no default on the loans under the moratorium”.

“During this period, the risks for banks’ gross impaired loan (GIL) ratio would come from corporate loans and the loans in other countries. Upon the completion of the moratorium, we believe the GIL ratio could continue to climb in 4Q2020, given the unfavourable economic climate,” it says in a March 31 report. It expects the GIL ratio to rise to 1.7% at end-2020 from 1.52% a year ago.

“The concerns over lethargic loan growth and an uptick in credit costs in 2020 lead us to retain our ‘neutral’ call on banks. However, we deem the 2020 dividend yield of 5.6% as attractive. Our picks for the sector are Public Bank and RHB Bank,” it adds.

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