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Can Investors Expect Bigger Dividends From DBS Group Holdings Ltd Soon?

The earnings season is rolling along nicely and there are companies releasing their quarterly results almost every other day. DBS Group Holdings (SGX: D05), South East Asia’s largest bank by assets, is one such company as it would be releasing its fourth quarter results soon on 14 Feb 2014.

The bank last paid out S$0.56 per share in annual dividends in 2012, giving it a historical dividend yield of 3.4% at its current price of S$16.51. This sets the bank’s yield apart from the average dividend yield of its other large-cap peers as the Straits Times Index (SGX: ^STI), at its current level of around 3,040 points, carries a yield of only 2.7%.

DBS’s dividend has held steady at S$0.56 per share since 2009, when it dipped from S$0.65 per share in the previous year. Can investors expect a larger annual dividend from the bank when it reports its full year earnings soon?

The bank does not have a fixed dividend policy, but rather, views dividends with a holistic view as part of its capital management and planning strategy. From the bank’s 2012 annual report: “The [bank] seeks to pay sustainable dividends over time, in line with its capital management objective and long-term growth prospects.”

In turn, this “capital management objective” is described by DBS as the need to “maintain a strong capital position consistent with regulatory requirements”.

On that front, one important regulatory requirement would be the Capital Adequacy Ratio (capital buffers that measures the amount of cushion that a bank has to absorb losses; the higher the ratio, the thicker the cushion) requirements set by the Monetary Authority of Singapore in accordance with the Basel III rules, a global regulatory standard for banks.

Here’s how DBS’ CARs stack up against MAS’ requirements:

 

MAS Requirements

DBS at end of 2012

DBS at Sep 2013

Tier 1 CAR

6%

14.0%

13.3%

Total CAR

10%

17.1%

15.9%

Source: DBS annual reports and earnings presentations

While DBS’ CARs have slipped a little from the end of 2012, they are still far above MAS’ minimum requirements, which give the bank plenty of wriggle room in its use of capital.

Since 2009, the bank’s dividend pay-out ratio (the percentage of earnings that are paid out as dividends) has decreased by almost half despite its constant dividend, as shown in the table below

Year

Pay-out Ratio

Dividend per share

2009

64%

S$0.56

2010

60%

S$0.56

2011

44%

S$0.56

2012

36%

S$0.56

Source: S&P Capital IQ

Over the past nine months of 2013, DBS has seen its total income (analogous to revenue for companies in other industries) increase by 11% year-on-year to S$6.78b while profits have moved up by 4% to S$2.70b. In the press release for the bank’s third quarter earnings in 2013, chief executive Piyush Gupta commented that “asset quality remains healthy” at the bank and that it has a sound portfolio and is “well placed to navigate the market uncertainties ahead.”

In its second quarter earnings release for 2013, DBS declared an interim dividend of S$0.28 per share, which is unchanged from what was paid out in the corresponding period in 2012. This happened despite the fact that the bank’s profit for the first half of 2013 was 5% higher than for the first half of 2012, giving DBS a lower pay-out ratio in the former period.

So, when we put it all together – a decrease in pay-out ratio despite better results; and having the need for a strong capital buffer in terms of its CAR – it would seem that DBS does have room to make do for higher dividends, but it might not be a move that jives well with how the bank wants to manage its capital.

In any case, investors can only know for sure when the bank reports its financials in the coming weeks.

Regardless of DBS’ total dividends for 2013, it’s also good to point out that the bank, along with its two local peers Oversea-Chinese Banking Corporation (SGX: O39) and United Overseas Bank (SGX: U11), have showed remarkable resiliency in their dividends in the face of the 07-09 Global Financial Crisis that engulfed many Western banks. And, that’s a testament of sorts to their prudence in managing risks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.