Are DBS, UOB & OCBC Dividends Safe In 2022?

HFA Padded
Guest Post
Published on
Dividend

2022 – what a year, between rising interest rates, inflation and wars.

US stock markets responded by entering a vicious bear market. Unlike 2020, there is no fast recovery in sight with central banks around the world tightening monetary policy.

Singapore banks like DBS, UOB & OCBC have not been spared. They have given up most of their gains from the start of the year.

Unsurprisingly, I’ve gotten a lot of emails about them.

One of the big questions is whether their dividends payouts are safe?

Q2 2022 hedge fund letters, conferences and more

Dividend
Alexsander-777 / Pixabay

2020 – The Year of COVID

It was not too long ago that we were facing a different kind of economic slowdown.

One caused by COVID-19.

Those were dark times as no one knew what was happening. Governments around the world bungled their initial response, leading to horrifying images of death around the world.

Singapore was not spared and I still remember the sight of empty shelves in supermarkets.

I remember it well as I was initially living in Hong Kong as the outbreak first started.

I flew back at the end of January thinking that I would be back by June at the latest.

Sadly this was not to be as Singapore entered a lockdown and borders were shut. It was as though the world had come to a virtual standstill.

The Implication of COVID-19 on Banks

Economic booms and recessions are normal.

The slowdown caused by COVID-19 was anything but.

The near standstill of many parts of our economy had never been seen before  & the economic shock was unprecedented.

In response, the Singapore government drew down its reserves and unacted multiple stimulus measures and schemes as JSS (Job Support Scheme) to stabilize the economy.

Graphical user interface, text, application, email Description automatically generated

The implications then were dire for banks as the sharp contract in economic activity had a twofold effect.

Businesses and consumers were less likely to take loans & existing loans were less likely to be paid off as economic activity stopped.

Like I mentioned earlier, an economic slowdown is part and parcel of the economic cycle.

However the sheer scale and speed of the slowdown was unlike anything we had ever seen.

In response, banks around the world slashed their dividends in order to conserve capital in anticipation of souring loans and poor economic activity.

Closer to home, HSBC stopped and suspended paying dividends temporarily leading to widespread shareholder discontent in Hong Kong.

While it initially seemed that Singapore Banks would be spared from this, this changed when MAS put on a dividend cap on Singapore Banks for them to build up their capital buffers.

MAS in effect urged them to cap their total dividends per share for the fiscal year 2020 at 60% of the 2019’s level.

When this news came out, share prices reacted predictably by coming down.

A Good Start to 2022…

Thankfully, the dark days of the pandemic are far behind us.

The introduction of reliable testing, effective vaccines and medical treatments have led to a sharp rebound in the economy.

In 2021, MAS decided to remove the dividend cap which led to dividends being reinstated and share prices of all 3 banks rising correspondingly.

Since then, the economy has gone from strength to strength with borders reopening and tourists returning in droves.

Hong Kong’s recent economic troubles and closed border policy has also inadvertently benefited us, leading to an increased flow in capital, people and business to Singapore.

This initially resulted in a surge in share prices at the start of the year with all 3 banks responding positively.

But Things Are All Not Rosy…

Unfortunately this rosy situation was not to be as the onset of the Ukraine-Russia War as well as the China lockdowns led to inflation rising significantly around the world.

It’s hard to believe oil prices went from negative to surging past $100 in just 2 years!

But’t thats the new reality we live in.

Interest rate hikes are generally positive for banks as they make more money from their loan books.

However in this case, markets responded negatively as the fear of a recession and higher non-performing loans loomed.

Why I think DBS, UOB & OCBC Dividends Are Relatively Safe For Now

At this point, it seems that we are almost certainly due for an economic slowdown if not a recession.

But the point I want to emphasize is that we have been through multiple recessions and slowdowns over the years.

The slowdown caused by COVID-19 for lack of better words was unprecedented.

Up till now, MAS had never imposed a dividend cap on banks and this was the first time it had ever done so.

It’s important to emphasize that the measures that the government & MAS took were without precedent and are not part of their normal policy playbook when there is a slowdown.

There might be small changes in their year to year dividends as UOB & OCBC  target a payout ratio of 40-50% of their earnings.

However, I doubt we will see anything on the scale of dividend cuts that we saw in 2020.

It goes without saying that dividends may actually trend up if the economic outlook is not as dire as predicted as rising interest rates are actually accretive to bank earnings.

Confused?

Just look at how much more you are paying for your housing mortgages, car loans and credit card bills and you will get a sense of the rise of the earning power of banks in the years to come.

What If the Economic Situation Worsens 

Andy Groove once said that – “Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.”

In the case of Singapore Banks, they have always thrived after each crisis.

Just recently, UOB acquired Citi’s consumer business in 4 Asean markets and DBS bought  Citi’s Taiwan retail unit to bulk up its regional presence.

Each time, Singapore Banks have emerged stronger and dividend payouts have always trended up.

Their intrinsic values and earnings power have grown correspondingly even in the era of low interest rates (which are generally bad for banks).

I have no idea when the economic storm will come or end… but I do know that the captains of the ships of all 3 Singapore Banks have navigated multiple storms successfully.

Article by , The Asia Report.

HFA Padded

If you are interested in contributing to ValueWalk on a regular or one time basis read this post http://www.valuewalk.com/guest-posts-hedge-fund-letters/ We do not accept any outside posts or even ads on penny stocks, ICOs, cryptos, forex, binary options and related products.