‘Banks likely to continue paying dividends’

KUCHING: Analysts at Hong Leong Investment Bank Bhd (HLIB Research) believed that banks in Malaysia are likely to be allowed to continue paying dividends.

These concerns came as financial regulators in Europe have asked their banks to freeze dividends and share buybacks in 2020. The move was intended to increase banks capacity to absorb losses and support lending to those affected by the Covid-19 crisis.

“We think there is more behind the dividend suspension in Europe,” it started off in its report. “While the top 10 banks over there have fairly robust average CET1 ratio of above 13 per cent, they tend to engage in riskier financial activities and thus, leave them more vulnerable to black swan events.

“Based on our observation, Malaysian banks have four to 13 times lesser trading derivatives and financial assets in their books compared to European peers; income generated from held for trading assets is highly volatile and the composition of this to total income is four times more in Europe.”

Besides that, the gross impaired loans (GIL) ratio of Malaysian banks is 40 basis points (bps) lesser than western counterparts; moreover, loan loss coverage (LLC) is 15ppt higher, indicating that Malaysian lenders are generally more prudent.

“Also, Malaysian banks were historically more discipline vs the Europeans in handing out dividends, where they plowback a larger fraction of their annual profit to retain earnings,” HLIB Research affirmed.

“Considering sound banking practices over the years, we reckon Bank Negara Malaysia (BNM) would not stop domestic banks from dishing out dividends, so long as their payout ratio are similar or lower vis-à-vis to historical levels.”

HLIB Research acknowledged a “cocktail of antidotes” by the government to prevent massive defaults.

“In the interim, we believe the six-month loan deferment will help to ease asset quality pressures while in the medium to longer term, troubled loans can be rescheduled and restructured,” it added.

“Seeing the unprecedented nature on how Covid-19 hit us economically, we think banks possibly will be granted more leeway to help rescue wounded businesses; in our opinion, BNM and the government would be inclined to keep these companies afloat as it would be easier to jump start the economy.

“In addition, we expect BNM to cut the overnight policy rate (OPR) by another 50bps to two per cent this year, bringing it back to the lowest level seen during the Global Financial Crisis (GFC); partly, the move lowers borrowing costs and also assist to restrain NPL from ballooning out of control.”

The research firm went on to perform an NPL stress test exercise, with results showing that almost all of the banks under its coverage could go into the red if their GIL ratio were to double from 4Q19’s levels.

“That said, we see low likelihood of this transpiring given the above measures taken by BNM and the government to maintain order. In any case, write-offs, impairment, and provision for bad loans are non-cash items, and since brought upon by Covid-19 events, can also be viewed as one-offs,” it said.

“Thus, these should not affect the ability of banks to distribute dividends, especially if hybrid scrip payouts are a norm.

“During the Asian Financial Crisis (AFC) and GFC, system NPL ratio was as high as 20% and 8% respectively vs our current GIL ratio of less than 2%. However, many of the banks under our coverage remained profitable throughout both periods (except for Alliance, AMMB, and RHB in AFC and only AMMB in GFC).

This time around we believe it is no different, considering banks are entering the laborious phase from a position of strength.

“In an absolute worst-case scenario if NPL spirals out of control, we do not think banks will go belly up as the government will revisit the past and come up with repertoire of solutions.”

Back during the AFC, Pengurusan Danaharta Nasional was one of the three special purpose vehicles established to facilitate economic recovery; its key role was to acquire NPL (with gross value above RM5 million) from the banking system as an asset management company.

While it may seem like a bailout, HLIB Research said it was in fact a win-win for the government and banking sector; this is because the move allowed the latter to switch attention from rehabilitating NPL to resume lending and help revive the economy.

“That said, today’s banking system is in a much better shape and it is well-positioned to absorb potential damage from the Covid-19 crisis, given prudent capital and liquidity buffers built up over the years. Also, the debt-at-risk from the household (HH) sector remained low at five per cent of total HH debt.

“In addition, banks’ exposure to large borrowers in 2019 has fallen to 38.4 per cent of total business lending.”