Although we await formal notification for the broader market, we understand that the SBP has advised banks to suspend dividend distribution (cash or stock/bonus) for March 2020 and June 2020. This is purportedly to conserve capital and help boost the lending capacities of banks. That said, if banks feel that there are strong reasons to announce dividend payouts in 1q and 2q 2020, they can approach the SBP to do so.
Within our coverage, MCB, HBL and ABL announced their 1q 2020 results today and all announced cash dividends (MCB beat our expectations by announcing a PKR5/sh dividend). Given it might be difficult to reverse these announcements, the directive may apply on a prospective basis, in our view. UBL announces its result at market open tomorrow, and it is unclear if it will now announce a dividend or not.
Although the SBP has highlighted that capital preservation is one of the reasons for this move, we flag that capital ratios for most banks in our coverage are well above minimum requirements. There is also room for policy maneuverability in other ways e.g. the Capital Conservation Buffer has recently been reduced by 1ppt to 1.5% and can be reduced further, additional D-SIB requirements (2% for HBL, 1% for UBL) are still in place and there have been no cuts to the CRR.
Instead, we suspect that the SBP may have been partially motivated by a desire to limit US$ outflow given some of the large banks are owned by foreign sponsors. In this regard, the total cash payouts for our universe banks amounted to c PKR65bn (US$400mn) in 2019. As per latest available data, fx reserves with the SBP stand at US$11.0bn.
As outlined above, we think there may have been better ways to preserve capital and boost lending capacity than restricting banks from announcing dividends. Defendable dividend yields was one of the reasons giving support to banking sector shares and, in the near-term, this directive may negatively impact investor sentiment. In general, we continue to prefer the large banks over medium banks given they are better placed to protect margins in a lower interest rate environment and have diversified non-interest income streams.