The capital and liquidity requirements for banks during the pandemic have been loosened by the Monetary Authority of Singapore (MAS) to strengthen banks to continue lending to businesses and consumers. This regulatory easing comes with the caveat that the additional capital should not be used for share buybacks.
Banks will now be permitted to fully recognise regulatory loss allowance reserves (RLAR) as Tier 2 capital, which is a boost from the current limited recognition. For the time being, the relief will apply until 30 September this year.
The RLAR is an account for additional loss allowance separated from retained earnings. Releasing in full the RLAR could release around 0.1 percentage point or S$404 million to DBS’ Common Equity Tier-1 (CET1) ratio, according to CGS-CIMB Securities.
Banks’ capital strength is signalled by the CET1 ratio and it measures lenders’ core equity capital in relation to their risk-weighted assets.
Through the RLAR release, an additional S$876 million or 0.4 percentage point to OCBC’s CET1 ratio and another S$638 million or 0.3 percentage point to UOB’s CET1 ratio can be generated. The Q4 figures were used to estimate these figures.
As of 31 December last year, the CET1 ratios of all three local banks were more than 14 per cent. DBS has the lowest ratio at 14.1 per cent, UOB at 14.3 per cent and OCBC the highest at 14.9 per cent.
“While we do not expect banks to utilise their entire excess in CET1 capital above the 9 per cent regulatory minimum, there is ample headroom of about S$12-15 billion if banks choose to use these buffers for lending,” an analyst at CGS-CIMB Securities, Andrea Choong spoke to the Business Times (BT).
As for the amount of stable funding that banks must set aside for loans to businesses and individuals which will mature in less than six months, MAS has reduced the amount to 25 per cent from the previous 50 per cent.
Banks have until 30 September this year to meet their net stable funding under the relief measure.
Other measures such as the deferment of regulatory reform implementation was also announced by MAS, particularly the final set of Basel III reform for banks in Singapore.
The implementation will be deferred for the final two phases of the margin requirements for non-centrally cleared derivatives. By doing this, the strain on banks’ resources can be lowered for them to carry out system changes and legal agreements to implement the exchange of initial margins.
The move by MAS to lower capital restrictions is similar to the move made by the US Federal Reserve last week as it enacted a temporary change to its supplementary leverage ratio rule which will improve banks’ ability to lend to businesses and households.
MAS remarked that sustaining bank lending should be prioritised more than “discretionary distributions”, as it rolled out the newest relief measures for banks.
“While MAS does not see a need to restrict banks’ dividend policies, the release of capital buffers should not be used to finance share buybacks during this period,” MAS informed.
Lately, UOB, OCBC and DBS, which are the three local banks, have carried out more share buybacks than usual. DBS has done the most of the three banks, as it spent S$368 million to repurchase it shares between 1 March and 20 March. In that time, DBS’ buy-back formed most of the value of share buybacks by listed companies.
“While our share buybacks are sized such that our capital position and ability to extend help to customers remains strong, we are supportive of MAS’ measure, recognising that these are unprecedented times for all,” according to DBS spokesperson.
On 26 March, share buyback activities were stopped by UOB, the bank stated. It added that as part of the bank’s incentive compensation programme for workers, the bank was granting restricted shares through the share buyback activities.
The acquired shares are to be used for meeting the deferred long-term compensation of workers, as mentioned by Darren Tan, who is OCBC’s chief financial officer.
Mr Tan spoke to BT: “We approach our buyback of shares on a long-term, systematic basis whereby we preclude ourselves from timing our purchases, but instead purchase small quantity of shares at regular intervals. This way, we do not disrupt the market dynamics in its discovery of the clearing price of our shares.”
“Additionally, given the small quantum of shares being purchased, our capital level will only be reduced marginally such that our capital and our ability to support our customers remain strong,” he added.
The Bank of England ordered banks to forgo outstanding dividends last week, which affected both Standard Chartered and HSBC. Despite this, MAS did not follow suit in dissuading dividend payments.
Dividend policy will have no changes for now, banks in Singapore told BT.
According to Mr Tan, OCBC has a progressive dividend that increases in proportion with its long-term growth.
“As we have built up a strong capital position over the years, we are confident that we would be able to maintain our dividend policy of paying progressive and sustainable dividends,” he remarked.
OCBC’s dividend payout ratio increased from 40 per cent in FY2018, which now sits at 47 per cent.
The policy of paying sustainable dividends which increase progressively with earnings over time will be maintained by DBS, it assured. The dividend payout ratio of the bank also sits at around 50 per cent. Similarly, the dividend payouts of UOB will stay at around 50 per cent of its earnings, the bank stated.
As banks assess the pandemic’s impact on future economic prospects in estimating accounting loan loss allowances, MAS advised banks to also take into account the extraordinary measures introduced by the state to strengthen the economy.
Even if the pandemic relief measures are applied to these loans, MAS pointed out that it is not expecting banks to maintain higher accounting loan loss allowances. Rather, a borrower’s risk of default should be assessed by banks thoroughly.
“We believe these measures are more of a supportive signal to the banks to keep liquidity flowing especially to SMEs, while also to giving clarity to the market, which is worried about a rapid escalation of credit charges,” an analyst at Maybank Kim Eng remarked regarding the matter.
Furthermore, new policies addressing the handling on customer complaints and rules on control against market abuse will be deferred by MAS.
MAS will focus its supervisory reviews on how financial institutions are dealing with the impact of the pandemic on their business and operations although MAS will defer its regular on-site supervisory visits and inspections to those financial institutions.
To verify and enforce the implementation of safe-distancing protocols, MAS has started to conduct on-site visits to financial firms’ customer-facing locations. MAS also advised financial companies to remain vigilant with regards to increased risks of terrorism financing, money laundering, fraudulent transactions, scams as well as cybersecurity threats.
MAS’ newest announcements came against the backdrop of the previous measures introduced last week which suggest that some relief packages should be catered towards aiding SMEs and property owners. Such measures include the permission to defer principal payments of secured corporate term loans and qualifying mortgages until the end of 2020.