Commercial banks have dominated the country’s stock market in terms of dividend tenure, offering the highest amount among the 35 sectors of the Pakistan Stock Exchange (PSX) over the past decade.
In terms of the total amount of cash dividends or even payouts as a percentage of profits, banks have led the way, distributing 823 billion rupees (about $ 4.65 billion at the current dollar rate) to their shareholders over the years. Past 10 years, with analysts expecting the princely race to continue. .
The analysis does not take into account the dividend as a percentage of the share price and does not reflect the absolute returns offered to shareholders.
While absolute returns between these sectors vary, of course, an analysis of the payouts of a shortlist of 211 (out of 546) listed companies that paid out at least a tenth of their accumulated profits in dividends over the decade reveals that the banking sector remained far ahead.
Dividends for the year ended December 2021 are not yet available.
So why are banks so generous?
“Some big banks have been around for decades, they have high retained earnings, which has allowed them to pay high dividends,” said Raza Jafri, head of equities at Karachi-based Intermarket Securities. Of the 14 banks shortlisted for this report, 8 banks paid dividends in each of the 10 years examined.
Jafri said most major banks have capital buffers, well above the central bank’s minimum capital adequacy ratio (CAR) requirement. These banks make huge profits by investing in government securities, which does not drag their RCA.
A gauge for assessing the financial strength of banks, CAR shows how much capital is available to a bank as a percentage of its risk-weighted credit. This regulatory requirement ensures that banks have sufficient reserves to handle a certain amount of losses and avoid the risk of insolvency.
A higher CAR value allows banks to have more room to invest in risk-free government securities and to comfortably maintain reserve requirements.
Jafri said loans to the private sector made up about 70% of banking sector deposits until 2008, but the equation changed after the financial crisis.
With the increase in the number of defaults, banks turned to risk-free Pakistani investment bonds, which offered double-digit yields. Over the past five or six years, more than half of bank deposits were in government securities – for some banks that number has even risen to 70%.
As banks continued to invest in government securities, they also got bad press in the process – the Pakistani government being their biggest borrower in 2017. Even during the period between 2016 and 2018, when interest rates were low. Falling below 7% to a decades-long low, the RCA of the big banks was 5 to 10 percentage points higher than the 11% required by the State Bank of Pakistan (SBP).
“If I look at the banks, such as MCB, whose dividends have always been good, the main reason is the high level of RCA and the growth in profitability,” said Umair Naseer, associate director of research at Topline Securities .
Naseer said bank profitability remained very strong even when interest rates were low. This is due to healthy growth in deposit rates, which have remained in double digits for many years, he said. “So that’s the main factor that led to a good payout. “
MCB Bank distributed 169 billion rupees in dividends to shareholders, the highest of any bank, and more than any other (except HBL and UBL) made in profit. Standard Chartered Bank (SCB) Pakistan led the list in terms of profit percentage distribution, giving 84% of its cumulative profits as dividends.
“If you ask me, Meezan Bank has been the best performing bank,” Jafri said of Pakistan’s largest Islamic bank which has grown exponentially over the past decade.
The analyst said Meezan can’t invest in government securities because they don’t comply with Sharia law, yet he is among the top 10 dividend-paying banks. Jafri disagreed that his performance was simply a function of being an Islamic bank.
“It has focused on growth, increasing the branch network, improving the quality of service and increasing its share in the automotive and real estate finance markets,” Jafri said of Meezan Bank, which became the largest bank by market capitalization last year.
Market analysts expect the banking sector’s exceptional dividend performance to continue for at least a few more years, but the SBP’s recent regulatory push could undermine its ability to pay large dividends in the medium to long. term.
In mid-2020, the SBP introduced a housing finance program and required commercial banks to lend at least 5% of their credit to the private sector to this program or face penalties.
Jafri said if banks don’t comply, they could face higher tax rates, which could affect their ability to continue paying such high dividends. There are already signs of this, he said.
“We saw MCB slightly miss our dividend expectations for the first time in 15 years during the January to March 2021 quarter.” Another big risk is the implementation of IFRS9 rules, a new accounting standard that will require banks to recognize a provision – recognize a loss on a loan – at the time of the loan, and not after a default.
“It could eat into their retained earnings and their capital ratios.”
Naseer agreed that implementing IFRS9 is a major risk for future dividends, but said there are a lot of ifs and buts around it. “It could be implemented in phases, not all at once.”
The analyst said overall banking sector valuations are attractive at the moment. “Even if the payout ratios do not increase, they will remain at the same level,” said the analyst, sharing his outlook for the next two years.
The writer is Marjorie Deane International Fellow at City, University of London