THE Monetary Authority of Singapore (MAS) has loosened certain capital and liquidity requirements for banks amid the virus outbreak, but with a clear caveat: that the release of capital buffers should not go towards share buybacks.
To allow banks to sustain lending to businesses and consumers, MAS on Tuesday said banks will now be allowed to fully recognise regulatory loss allowance reserves (RLAR) as Tier 2 Capital, up from a limited recognition at the moment. The relief will apply until Sept 30, 2021 for now.
As it is, all three local banks have Common Equity Tier-1 (CET1) ratios of more than 14 per cent as at Dec 31. OCBC has the highest at 14.9 per cent, followed by UOB at 14.3 per cent and DBS at 14.1 per cent. The CET1 ratio is a signal of banks' capital strength, and measures lenders' core equity capital against their risk-weighted assets.
Andrea Choong, analyst at CGS-CIMB Securities, told BT: "While we do not expect banks to utilise their entire excess in CET1 capital above the 9 per cent regulatory minimum, there is ample headroom of about S$12-15 billion if banks choose to use these buffers for lending." (see correction note)
MAS also further moved to lower the amount of stable funding that banks must set aside for loans to individuals and businesses that are maturing in less than six months. This will now be 25 per cent of the loans, halved from 50 per cent.
The relief for banks in meeting its net stable funding ratio will apply until Sept 30, 2021 for now.
Other measures that MAS announced include a deferment of regulatory reform implementation, specifically the final set of Basel III reforms for banks in Singapore.
The implementation of the final two phases of the margin requirements for non-centrally cleared derivatives will also be deferred to reduce the strain on banks' resources to put in place legal agreements and system changes to implement the exchange of initial margins.
The relaxation of capital restrictions is in line with similar moves by the Federal Reserve which announced last week a temporary change to its supplementary leverage ratio rule to boost banks' ability to provide credit to households and businesses.
In issuing the latest relief measures for banks, MAS said sustaining lending activities should take priority over "discretionary distributions".
"While MAS does not see a need to restrict banks' dividend policies, the release of capital buffers should not be used to finance share buybacks during this period."
The three local banks - DBS, OCBC and UOB - have done more share buybacks than usual recently, though activity was mainly driven by DBS. Between March 1 and 20, DBS spent S$368 million to buy back its shares, making up the bulk of the value of share buybacks by listed companies in Singapore in that time.
A DBS spokesperson said: "While our share buybacks are sized such that our capital position and ability to extend help to customers remains strong, we are supportive of MAS' measure, recognising that these are unprecedented times for all."
UOB said it ceased share buyback activities on March 26, and said the share buyback activities were to grant restricted shares as part of the bank's incentive compensation programme for employees.
Likewise, OCBC's chief financial officer Darren Tan said the acquired shares are meant to meet the deferred long-term compensation of employees. "We approach our buyback of shares on a long-term, systematic basis whereby we preclude ourselves from timing our purchases, but instead purchase small quantity of shares at regular intervals. This way, we do not disrupt the market dynamics in its discovery of the clearing price of our shares," he told BT.
"Additionally, given the small quantum of shares being purchased, our capital level will only be reduced marginally such that our capital and our ability to support our customers remain strong."
MAS did not dissuade dividend payments, even as the Bank of England last week ordered banks there to scrap outstanding dividends, impacting HSBC and Standard Chartered.
Banks here told BT that there will be no changes to their dividend policy currently.
OCBC's Mr Tan said the bank has a progressive dividend that grows in tandem with its long-term growth.
"As we have built up a strong capital position over the years, we are confident that we would be able to maintain our dividend policy of paying progressive and sustainable dividends."
Its dividend payout ratio now stands at 47 per cent, up from 40 per cent in FY2018.
UOB said that dividend payouts will remain at about 50 per cent of its earnings, while DBS maintained that its policy of paying sustainable dividends that rise progressively with earnings over time remains. DBS' dividend payout ratio also stands at about 50 per cent.
MAS has guided further that when banks assess Covid-19's impact on future economic conditions in estimating accounting loan loss allowances, they should also consider the extraordinary measures taken by the government to bolster economic resilience.
MAS said that it does not expect banks to maintain higher accounting loan loss allowances solely because Covid-19 relief measures are applied to these loans. Instead, they should assess a borrower's risk of default comprehensively.
On this, Thilan Wickramasinghe, analyst at Maybank Kim Eng, said: "We believe these measures are more of a supportive signal to the banks to keep liquidity flowing especially to SMEs, while also to giving clarity to the market, which is worried about a rapid escalation of credit charges."
MAS will also defer new policies that include rules on controls against market abuse, and in handling customer complaints.
And while regular on-site inspections and supervisory visits to financial institutions will be deferred, MAS will focus its supervisory reviews on how financial institutions are managing the impact of Covid-19 on their business and operations.
MAS has begun to conduct on-site visits to financial firms' customer-facing locations to verify and enforce the implementation of safe-distancing measures.
Financial firms must also stay vigilant to heightened risks such as cybersecurity threats, fraudulent transactions and scams, money laundering, and terrorism financing, added MAS.
This latest announcement by MAS comes on the back of measures unveiled last week that spelt out how certain relief packages should be structured to help small and medium-sized enterprises and property owners. These include the options to defer principal payments of qualifying mortgages and secured corporate term loans till the end of the year.
In an earlier report, CGS-CIMB Securities had said that releasing in full the RLAR may release some S$404 million, or 0.1 percentage point, to DBS' CET1 ratio, an additional S$638 million or 0.3 percentage point to UOB's CET1 ratio, and another S$876 million or 0.4 percentage point to OCBC's CET1 ratio. This is not correct.
The figures mentioned above include other variables aside from RLAR, and are thus not representative to use. The incremental increase in tier 2 capital from the RLAR pool is in effect minimal given the previous partial recognition treatment, says CGS-CIMB.