Chinese banks may have to trim or even skip dividend payout this year, in the footsteps of some western banks, because of the biggest earnings setback since the global financial crisis in 2008.
Report cards from some of the nation’s biggest lenders this quarter have pointed to the worst slump in more than a decade. Lenders have been asked to perform national service by sacrificing their profitability to support the country’s economic recovery.
Shrinking profit is likely to prompt lenders to shore up their capital adequacy buffer amid a wave of bad loans as businesses cratered from the impact of Covid-19 pandemic. China’s economy shrank 6.8 per cent in the first quarter, before rebounding 3.2 per cent last quarter.
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“Banks’ capital adequacy ratios would drop drastically if they continue to maintain their usual dividend payout ratio,” said Chen Shujin, a banking analyst at Jefferies. A 10 per cent drop in net profit is likely to cause banks to withhold dividend this year, Chen added, while a 5 per cent setback could prompt them to reduce the payout ratio by 10 percentage points.
Senior Chinese bank officials this month said their 2020 full-year profit will continue to weaken after recording about 9-10 per cent decline in the first half. Their core tier-1 capital ratios have also dropped as they dialled up provisioning for bad loans.
Scaling back dividends would be a blow to investors who have been accustomed to seeing a 20-30 per cent payout over the years. This was highlighted in April, when HSBC scrapped its final interim dividend, saying it was not planning any further payments.
Xinjiang Kashi Rural Commercial Bank has set a local precedent. The lender disclosed in June that it would slash its 2019 dividend by 20 per cent after the banking regulator asked it to retain more earnings to bolster its balance sheet.
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The Chinese government in June urged banks to sacrifice as much as 1.5 trillion yuan (US$220 billion) in profits this year to finance cheap loans, cut fees, defer loan repayments and grant more unsecured loans to help small businesses beat the slump.
“Covid-related support measures imposed on banks will mean that city commercial banks will face a double-headwind in capital replenishment, and [worsening] asset quality,” said Li Nanqing, president at WeBank, a digital bank controlled by Tencent, at a forum on Wednesday.
The amount of non-performing loans of listed-banks rose by 10.19 per cent to 1.74 trillion yuan in June from December last year. Smaller city and rural commercial banks may feel a bigger pinch from such state order, due to their more limited source of earnings.
Banks can bolster their tier-1 capital by 300 billion yuan to 500 billion yuan by 2024, just by slashing their dividend payout ratio from 30 per cent to a range of 20 to 25 per cent over a five-year period, Iris Tan, an analyst at Morningstar, wrote in a report.
Some of the major bank shareholders, such as China’s national social security fund, rely on dividend payments to fill their funding coffers, a factor to be considered when banks tweak their dividend policy.
Banks have very limited avenues in replenishing their core tier-1 capital, whereby the regulatory minimum requirement is at 7.5 per cent. A part of a bank’s capital that helps them guard against unexpected expenses, core tier-1 can only be satisfied either by earnings, or common equity.
According to regulations, state-controlled Chinese banks are not allowed to price new share placements below their per-share book value. As banks fell out of favour with investors, some like Industrial and Commercial Bank of China, China Construction Bank have seen that ratio languish below one.
More from South China Morning Post:
- China’s top banks swamped by wave of Covid-19 related bad loans see pandemic casting shadow on full-year profits
- Chinese banks brace for cost of national service to shore up economy as debt reprieve, soured loans erode earnings
- Coronavirus: China calls on banks to give up US$212 billion in profits to finance cheap business lending
- Chinese banks stampede to offer perpetual bonds as incentives spur risky debt issuance