Equity Analysis / Global

Emerging Market banks: Assessing dividend vulnerabilities

  • Central banks in Vietnam, Bangladesh, Pakistan, Morocco and Ghana have restricted the dividend payouts of their banks
  • We think banks in Sri Lanka, Russia and the GCC could also prove vulnerable to dividend cuts
  • Place to hide? We highlight ten high-yielding banks in our coverage with more defendable dividends
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Bangladesh Bank, the country’s central bank, announced some restrictions today on dividends that can be paid by the country’s commercial banks. This follows an edict by Morocco’s Bank al-Maghrib yesterday, with the regulator asking commercial banks to halt dividend payments. We note that similar announcements were made by the State Bank of Vietnam and State Bank of Pakistan previously.

Table 1: New central bank-imposed dividend restrictions in selected EM, FM 



CAR-based dividend restrictions (capped at BDT1.5/share)


Banks mandated not to pay dividends for 2019 and 2020


Banks urged to withhold dividends for 2020


Dividends temporarily suspended for Q1 and Q2


Central bank encourages banks not to pay 2019 dividends


Dividends payments deferred for 90 days (from Mar 2020)


Cash dividend payments suspended

Source: Central banks, IMF, Tellimer Research

Why dividends are under threat

The main rationale for all these regulatory announcements is the likelihood of higher provisioning needs as the global recession drives an increase in borrower defaults. In addition, many banks in the aforementioned markets are typically thinly capitalised. In Figure 1 below (taken from our report: The EM and FM banks best able to cope with weaker loan quality), we highlight the capacity of banks to absorb higher provisions before breaching a 12% tier 1 capital ratio threshold. Banks in Vietnam and Bangladesh fare most poorly.

Figure 1: Percentage point increase in NPLs ratio to cut tier 1 ratio to 12%

Source: Bloomberg, Tellimer Research. Note: Assumes 100% provisioning of existing and new NPLs. Calculations based on 2019 data

Where are dividends most vulnerable?

As Figure 1 highlights, in addition to banks in Vietnam, Bangladesh and Pakistan, where dividend restrictions have already been introduced, those in Sri Lanka also seem to have limited capacity to absorb higher loan defaults and could suspend quarterly dividends even if this is not a regulatory requirement.

Other at-risk sectors include Russia (the central bank has already advised banks not to pay dividends) and the GCC banks, not least given the collapse in oil prices, which poses an additional threat to loan quality in these markets (such as forcing Saudi Arabia to introduce austerity measures and hike VAT). However, ownership considerations may also play a role; for example, Bank Muscat recently paid a healthy dividend for FY 19; its core shareholder is the Royal Diwan, for whom this income is likely welcome during these tough times.

Are there any places to hide?

The charts above highlight that banks in certain SSA markets, notably Uganda, Ghana, Nigeria, Rwanda, have significant capacity to absorb new NPL formation. It is of course possible that they will experience higher new NPL formation than other markets (such as Vietnam, which has so far had a relatively mild coronavirus experience) due to, for example, a less disciplined approach to tackling the Covid-19 threat. But overall, we would argue that the risk of dividend restrictions is more remote in these markets.

A key exception is Ghana, (which incidentally has already relaxed lockdown rules, even as the Covid-19 infection rate accelerates). Here, the central bank has decreed that no dividends should be paid from FY 19 and FY20 earnings – while the names in our coverage are well-capitalised, this is not a universal trait – the regulator may prefer to keep this excess capital in the sector (eg to help rescue weaker names) than see it exit as dividends.

High yielding banks with more defendable dividends

We highlight ten names in our coverage which have high dividend yields, manageable payout ratios and strong capital ratios, drawing on work in our report FM and EM banks: Opportunities in adversity. As such, they may be of interest to yield-seeking investors, particularly those looking to reduce the volatility of their portfolios. Sign up today to access the full report. 


We thank the following for their assistance with this report:

Nkemdilim Nwadialor (Tellimer), Faith Mwangi (Tellimer), Kavinda Perera (Asia Securities), Dalia Bona (Pharos Holding), Evgeniy Kipnis (Alfa)

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Equity Analysis / Pakistan

Pakistan banks: Stress testing on revenues & asset quality

  • If the coronavirus pandemic extends for a prolonged period, banks will face pressure on both revenues and asset quality
  • Stress testing concludes earnings are most vulnerable to a spike in loan provisions vs. margin compression
  • Even in a stressed scenario, IMS Banks trade at a forward P/E /P/B of 0.77x /7.47x which is not particularly expensive
Raza Jafri @ Intermarket Securities
19 March 2020

Pakistan banks are down 30% in March’ 20 vs. a 20% decline for the KSE-100. If the coronavirus pandemic extends for a prolonged period, banks will face pressure on revenue (both funded and non-funded lines) and asset quality (including impairment on equities). The SBP has not yet announced any relief measures for banks.

We stress test our models to gauge possible earnings ranges in a bear case scenario. Banks earnings are most vulnerable to a spike in loan provisions (ignoring the potential for availing FSV benefits). Margin compression is less of a concern even though the offsetting prospects via higher loan growth and capital gains are slim. Systemic CAR of over 16% appears adequate but some smaller banks, not in our coverage, could potentially be vulnerable.

Assuming swift margin compression, lower fee income and a cost of risk similar to the last downcycle (2008-11), our base-case 2020/21f EPS estimates come off by 30/39%. Even on this stressed scenario, the IMS Banks Universe is trading at a forward P/B of 0.79x/0.77x and P/E of 7.75x/7.47x – not particularly expensive, which may help arrest further large declines in share prices and possibly compel value buyers to build positions. 

SBP cuts policy rate by 75bps – monetary easing begins

The SBP cut the policy rate by 75bps to 12.5% in the March 2020 monetary policy. This is the first rate cut in almost four years. The SBP has also shifted the interest rate corridor up by 50bps; this move will serve to cut banks’ earnings by c 5%, all else the same, as it reduces the quantum by which savings deposits (40% of overall deposits) will reprice. Following the 75bps cut in the policy rate, margin compression would have begun to come through from 2H20 but the shift in the interest rate corridor brings this timeline forward. 

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Equity Analysis / Pakistan

Pakistan's Ferozsons enters negotiations for Remdesivir production

  • FEROZ is in negotiations with Gilead Sciences to manufacture a Covid-19 treatment drug named Remdesivir
  • This is a non-exclusive license agreement where SEARL and Getz Pharma may also be potential candidates
  • If FEROZ successfully avails the license agreement, it is likely to fetch the top-end of premium valuations
Yusra Beg @ Intermarket Securities
12 May 2020

In an exchange filing yesterday, Ferozsons Laboratories Limited (FEROZ) notified that it has entered negotiations, via its 80% owned subsidiary BF Biosciences Limited (BFBL), to potentially reach a non-exclusive license agreement with US-based Gilead Sciences for the manufacture and sale of Remdesivir in Pakistan and 126 other countries. Remdesivir is a US FDA approved wide-spectrum antiviral drug used to treat advanced stage Covid-19 patients. 

However, the non-exclusivity of the agreement opens the field for several other local players and unlike FEROZ’s previous blockbuster drug Sovaldi – an innovator drug, for which it maintained a monopoly until patent expiry. Data from a trial by the National Institutes of Health (NIH) in the United States showed Remdesivir reduced hospitalisation stays by 31% compared to a placebo treatment, but it did not significantly improve survival.

We think Searle Company (SEARL) and Getz Pharma may also be candidates to obtain this license because of their existing presence in biosciences (Hep-C, HIV). Sanofi Pakistan (SAPL) may also potentially emerge with Regeneron Pharmaceuticals with other drugs later in the year, in our view.

Lead time to production is likely to be shorter than Sovaldi

Gilead’s patent on Remdesivir means it has the exclusive rights to produce it. But, under international trade rules, nations defined by the UN as least-developed countries (including Pakistan and Bangladesh) can ignore such patents and make drugs more affordable in their markets. 

Remdesivir is one of several repurposed drugs drawing cautious optimism for efficacy in Covid-19 treatment. These drugs are normally indicated for other diseases, where a shortened development timeline and reduced costs for existing compounds is particularly advantageous in a pandemic situation. The lead time to production is expected to be extremely short where Bangladesh’s largest drug makers, Beximco Pharmaceuticals, announced that it will start production in mid-May 2020 (under a similar agreement with Gilead). However, the exact timeline for FEROZ is yet to be determined as (i) negotiations with Gilead are still underway, (ii) sourcing of API remains and (iii) regulatory approval from DRAP have yet to be obtained. We expect it should be shorter than Sovaldi (7 months) due to the urgency of the situation.

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