DBS Group Holdings’ capital return plan “outclasses” its rivals in balancing returns and sustainability, says Bloomberg Intelligence’s senior credit analyst Rena Kwok.
In contrast, Oversea-Chinese Banking Corporation (OCBC) has room to optimise its capital structure as rates fall, adds Kwok in a March 6 note, pointing to its “above-peers” weighted cost of capital.
In weighing the “good and bad” of the three banks’ capital structure, Kwok says their “ample capital” this year means they are likely to curb debt issuance, with “solid” earnings supporting capital returns and modest risk-weighted asset growth.
UOB’s capital structure ‘most optimised’
Singapore banks might have room to lower their weighted average cost of capital (WACC), says Kwok, by borrowing amid market expectations for further interest rate cuts.
Among them, the three banks have at least $3 billion in excess common equity tier-1 (CET-1) capital above their target operating range of 12.5% to 14% for capital returns as of 4QFY2024, she adds.
With existing capital bonds like additional tier-1s (AT1) and tier-2s (T2) nearing call dates, refinancing potential is once again rising, says Kwok.
As at March 3, the lenders had about $800 million of T2 capital rolling off and $700 million of AT1s callable in 2025.
Bloomberg Intelligence’s calculated WACC for Singapore banks on a consolidated basis as of 4QFY2024 modestly exceeded the lenders' five-year average of 7.7%, says Kwok. “United Overseas Bank’s (UOB) WACC was the lowest, signalling the most optimised capital structure, while OCBC's WACC was the highest among peers.”
See also: UOB’s capital strategy leaves sufficient room for regional growth
Large capital cushions
Capital is likely to stay ample in 2025 among banks despite their respective plans to return between $2.5 billion to $3 billion over the next one to three years, says Kwok.
“Strong earnings will sustain CET-1 levels, supporting capital returns and absorbing likely modest risk-weighted asset growth in 2025,” she adds.
According to Kwok, “major” mergers and acquisitions (M&A) are unlikely in the near term given global risks, but capital returns could rise if capital generation strengthens, especially if interest rates are high for longer.
Kwok reiterates that “suboptimal” AT1 and T2 capital ratios allow for the banks to optimise their capital structure as rates fall.
In 4QFY2024, UOB led with a 15.4% fully phased-in CET-1 ratio, while banks’ average risk-weight density fell to 40%, down 4 percentage points y-o-y.
Who stands out?
See also: OCBC makes up for FY2024 earnings miss with special dividend, sees NIM falling to around 2%
The bank’s capital return plans, which combine dividends and share buybacks, optimise excess capital and preserve capital bases, says Kwok.
“The strategies have distinct benefits,” she adds. “Special dividends offer flexibility without long-term commitments and share buybacks boost earnings per share.”
Unlike DBS and UOB, OCBC is focusing more on dividends than share buybacks in its return plan, limiting its earnings per share (EPS) upside.
Meanwhile, UOB’s $2 billion buyback can support valuations but its longer three-year execution period delays immediate investor benefits, says Kwok.
Finally, Kwok says DBS’s capital return plan over the next three years balances EPS growth and earnings sustainability with a 15-cent capital return dividend per quarter in 2025, alongside its $3 billion buyback and a 27% rise in FY2024 ordinary dividends.
This makes DBS’s capital return plan “more immediate and effective”, says Kwok.
As at 1.33pm, shares in DBS are trading 4 cents higher, or 0.09% up, at $46; while shares in UOB are trading 14 cents higher, or 0.36% up, at $38.64; and shares in OCBC are trading 3 cents higher, or 0.18% up, at $17.22.
Read about the capital return plans of the three banks:
