Karachi, March 11, 2022 (PPI-OT): Banks: Are the recent higher pay-outs sustainable?

Dividend payouts of Pakistan Banks continue to remain healthy where most banks announced higher final dividends. The few exceptions which announced 35% and below payouts pinned it on meeting adequacy requirements, maintaining stable payout ratio and prioritizing growth.

We try to decipher sector’s capacity to keep the recent momentum on payouts sustainable w.r.t their adequacy levels and respective buffers (table inside). We believe most banks are comfortably positioned above their respective adequacy requirements and hold the capacity to maintain CY21 payout ratios in CY22E and beyond. We also look at the varying degrees of leverage on different banks and how the same is feeding into differing ROEs and payout capacities.

We reiterate our liking for UBL, MCB, BAFL and HMB being strong dividend plays offering a double-digit D/Y at current levels.

Banks announce higher dividends with comfortable CAR

With the banking sector’s result season ending with a surprise dividend from National Bank of Pakistan (NBP), it added to the list of peers announcing higher than expected dividends alongside CY21 results. Among the list are Habib Bank Ltd (HBL), United Bank Ltd (UBL), Bank Al Habib Ltd (BAHL) and Habib Metropolitan Bank (HMB). However, a few banks such as Bank of Punjab (BOP) and Askari Bank (AKBL), that usually announce final dividends, skipped their pay-outs for CY21. The higher dividends from other banks, offset the absence of dividends from AKBL and BOP, keeping pay-out ratio of our banking universe unchanged at ~40%.

Dividends being a factor of adequacy levels, we highlight JS Banking Universe’s Common Equity Tier (CET I) dropped by ~100 bp to 12.91% during CY21; led by 19% YoY expansion in Risk Weighted Assets (RWA), where total Tier I Capital expansion was limited to 10% YoY. To note, bottom-line grew by 14% YoY. On an average, banks are ~400 bp above its respective minimum CET I requirement (excluding COVID relaxation), ranging from ~100 bp to up to 10 ppt.

Translating to strong D/Y plays

Banks that decided to keep a lower pay-out ratio was reasoned by a balance of supporting adequacy ratios and/or prioritizing growth. On the other hand, among our sample base, half of the banks have reported a pay-out ratio higher than 35% and all of these are currently offering double-digit D/Y.

Varying degrees of leverage reflecting in ROE and payouts

Banks with a higher pay-out also include the ones that have kept a higher leverage ratio to optimize their capital to generate a higher ROE, enhancing absolute pay-out prospects. Where we have the two higher ROA generating banks, MCB and MEBL, the latter’s ROE is 2x the former’s on the back of the leverage factor. Similarly, despite a lower ROA generated by BAHL and HMB when compared to MCB, their ROE is also higher than MCB, owing to maintaining a higher equity multiplier ratio on its assets.

Going forward, with asset re-pricing impact to complete during 1HCY22, banking sector profits are expected to grow by ~15% YoY this year, and increasing absolute dividends. We expect a similar pay-out ratio to continue in CY22, making the D/Y players even attractive at CY22E dividends. We highlight UBL, MCB, BAFL and HMB with D/Y above 11% as strong dividend plays from the sector.