On February 26, OCBC announced a return of $2.5 billion of capital to shareholders over two years via special dividends and share buybacks. In addition to a final dividend of 41 cents, a 16-cent special dividend was announced on February 26.
“In a share buyback, the capital base shrinks so the EPS and ROE go up. If a bank pays more dividend, earnings per share (EPS) won’t go up. Share buybacks have a positive impact on both EPS and ROE, more significantly so when the buyback is done below 1 x price to book value because the shares cancelled are worth more than what has been paid for them,” Goh explains.
On the dividend front, when the number of shares is fewer, the dividend per share is higher based on the same dividend payout ratio, she adds.
Analysts have shared that dividends are “instant gratification” while share buyback benefits accrue over time. They have pointed out that on a time horizon of 10 years, JP Morgan has bought back almost 25% of shares while Apple has bought back 36% of its shares.
See also: The evolution of UOB’s CFO
The EPS of these companies will benefit if the buyback continues for a long period. As they see it share buybacks are about delayed gratification.
Analysts point out that developed market banks try to balance between regular dividends, special dividends and share buybacks. Share buybacks for Singapore banks were announced in the past year, and if it goes on for at least five years, there would be a discernible impact on the numbers, analysts say.
On Feb 19, United Overseas Bank announced a special dividend of 50 cents to be paid over two tranches this year and a new share buyback programme of $2 billion. The impact will lower UOB’s CET1 by 1 percentage point on a 2024 pro forma basis, the bank said.
DBS Group Holdings announced a $3 billion share buyback programme in November 2024, and a capital return programme of 15 cents a quarter for 2025 on Feb 10.
Dividends and share buybacks have to be balanced with banks’ franchise growth. “Various factors have to be looked at holistically and on a forward-looking basis, taking into consideration market conditions to decide on how much potentially we pay out, as dividend on a regular basis, and see if we could also do a capital return. This needs a comprehensive review of our position now and our business plan in future, to also gauge potentially what sort of macroeconomic environment we are going to experience,” Goh points out.
Stress tests
In their 1Q2025 results announcements, the local banks reiterated there was no change to the capital management initiatives they announced in February.
As par for the course, banks must identify all material risks (e.g., credit risk, market risk, interest rate risk in the banking book, liquidity risk, operational risk) and assess their potential impacts on capital.
The internal capital adequacy assessment process (ICAAP) is where a bank internally assesses its capital needs.
“We are very involved in the internal capital adequacy assessment process. Every year, we have to put together the business angle, the capital angle and the risk angle and assess them using our internal method, in addition to the regulatory-prescribed risk-weighted assets. The computation is our own internal capital assessment, based on identification of all material risks that a bank is exposed to as the bank grows. From there, we will look at the baseline business projection of profit for the next three years under a normal base case operating environment and assess the level of capital required,” Goh .
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“We will also design two stress scenarios, typically resembling a 1-in-25 stress event. We stress test our portfolios to see what would be the impact on, for example, income, expense, allowances, and also the risk weights of our assets, because that would impact the portfolio quality,” she continues.
If the credit profile of a particular loan deteriorates because of the impact of the scenarios, and the risk-weights rise correspondingly, the capital required to maintain the same level of capital adequacy ratio will also need to go up.
“If the capital adequacy ratio (CAR) were to fall below a certain target, we would want to line up the management actions to bring the capital adequacy back up,”.
In the CAR framework there is a capital conservation buffer of 2.5%, to promote the conservation of capital and the build-up of adequate buffers above the minimum requirement that can be drawn down in periods of stress.
During OCBC’s AGM on April 17, group chairman Andrew Lee assured shareholders that the banking group did an annual stress test. He said it's almost like a religious process. “We have armies of CFAs, we have armies of financial people, accountants, calculating all these numbers. This process is done yearly and is audited. We have enough capital to cater for all these events, all these stress tests, all these challenges, by market events, and enough capital to grow, to invest,” he had said.
Many aspects
Managing the financial plumbing of a bank is multi-faceted. For instance, Goh has to keep watch on the various regulatory requirements and changes announced by the Basel Committee on Banking Supervision (BCBS) and the Monetary Authority of Singapore.
A feature at OCBC’s results briefings over the years has been its low level of non-performing loans and credit costs versus peers. This was no different in FY2024’s results in February and its 1Q2025 results in April.
In FY2024, OCBC announced total credit costs of 19 basis points in FY2024, 21 bps in 4Q2024, and 24 bps in 1Q2025. Its NPA ratio, of 0.9% as at end-March, unchanged q-o-q, is the lowest among peers.
During the coffee chat, Goh revealed that the bank has a calculator. Whenever there is loan origination, the relationship manager (RM) will use a “calculator” to assess the capital requirement and returns from that loan. Returns will include fee income from loan fees and from cross-selling of treasury products that RMs can get from the transaction right at origination.
With such information at loan origination, the RM, as well as the credit controller will have an assessment of the impact on risk-weighted assets (RWA) and return on RWA (RORWA) which will eventually drive the return on equity (ROE).
“The “calculator" was developed by our finance department and is used consistently to assess the financial impact of loans at origination,” Goh reveals. The calculator will enable the RMs to evaluate whether the loans they want to originate will meet the RORWA target.
In using the “calculator”, risk weights will be assigned for the loans being onboarded, taking into consideration the collateral relevant to the specific loan.
It’s complicated
The Basel III framework was developed in response to GFC to ensure banks have sufficient capital and risk management capabilities to withstand financial shocks, promoting stability and resilience in the global banking system.
The local banks started reporting their liquidity coverage ratios in 2015, and their net stable funding ratios in 2018. In 2024, the local banks started reporting their transition common equity tier 1 (CET1) ratios.
Internal models were used in Basel II which provided a range of options for banks to select the approaches that are appropriate for the operations and risk profiles, with the aim to improve the way banks manage risks.
A common approach is the internal ratings based (IRB). It means developing credit rating models to be able to rate credit exposure by different asset classes with different risk and capital requirements. “We developed credit rating models for the different products, whether it's corporate lending, sovereign asset class or residential mortgages,” Goh says.
During the time of the GFC, some banks had internal rating models that gave risk weights that were lower than other banks for the same asset class, resulting in lower capital requirements. The regulators got concerned.
Basel III Reforms further strengthens the Basel III framework to restore credibility in the calculation of RWA and improve the comparability of banks’ capital adequacy ratios. The output floor was introduced as one of the Basel III Reforms regulatory requirements to reduce excessive variability in capital requirements derived from internal models.
The output floor limits the benefit banks can gain from using internal models to calculate RWAs, ensuring that these models don't reduce the RWAs below a certain percentage of what would be required under standardised approaches. Specifically, it requires that RWAs calculated using internal models cannot be less than 72.5% of those calculated under standardised approaches. Additional RWAs will be required under the output floor where 72.5% of RWAs calculated under standardised approaches is higher than RWAs computed using internal models.
Growth scenarios
Two important determinants of higher profits for banks are interest rates and economic growth. In the past 10-15 years, fee income has been a growing business line for the three local banks.
“For fees, it really depends on how much we generate out of $1 of loan. The demand for hedging has risen, whether it is foreign exchange effects or interest rates. This is something I see good prospects. The world has become more uncertain. As a bank, this is the advice that helps customers manage and protect their businesses as well as helping us generate more fee and advisory income,” Goh says.
The bank also manages consolidated income and earnings of its overseas subsidiaries through its structural foreign exchange risk. “When we have overseas subsidiaries, they generate earnings which go into their equity base. As a group we have what we call structural foreign exchange risk where we manage the position through hedges. We have a systematic approach on how much we want to hedge to manage our structural foreign exchange risk and we will execute the hedges accordingly,” Goh reveals.
In the last three years, the interest rate cycle enabled the bank to grow net interest income (NII) and build up a certain level of capital. The bank also started investing in AI, digital and other technologies. “Now we are approaching a situation where we are reaping the benefits of the investments in terms of efficiency, productivity gain, and being able to do more without growing headcount is the key going forward because of the slowdown in NII growth,” Goh says.
Being able to grow fee income, in particular wealth management fees, is important to make up for the slowdown in NII growth. However, wealth management prospects depend on the state of the economy. If the economy slows, businesses will invest less, consumers will buy less, exporters will export less, trade income will fall, investors will also invest less. For banks, earnings growth is dependent on economic conditions.
In conclusion, at a time when activist shareholders and corporate governance advocates are becoming increasingly visible and audible, shareholders may want to show some appreciation for the CFO, whose hard work is at the centre of earnings growth, managing risk, capital, and regulations to deliver regular dividends and shareholder returns.
