Why Thai banks are unlikely to give out extra dividends this year

Banks may need the extra capital as demand from large corporates rises.

The market has been sending banking stocks up on expectations that high capital bases may lead to extra dividends. Maybank Kim Eng analysts deem this unlikely as: 1) new accounting standard IFRS9 from Jan 2019 may require banks to set aside more provisions; and 2) banks themselves may need extra capital for corporate lending after recent improvements in loan growth. 

Here's more from Maybank Kim Eng:

The market is apparently expecting extra dividends this year, on account of banks’ very high capital. CAR averaged 17.6% as at end-Jun 2017, towering above the 9.75% required by regulators.

Last year, KKP paid out an extraordinary 92% of its earnings, citing high capital. The market must be hoping that other big banks will follow suit this year.

Extra dividends are unlikely, in our view. Firstly, a new accounting standard, IFRS9, will kick in in Jan 2019. How banks need to calculate their expected credit losses remains uncertain.

As this will determine the amount of provisions they need to set aside, we think they are likely to keep capital for at least another year, in case IFRS9 provisions are higher than expected.

Secondly, lending to large corporates has improved recently, spurred by government-led infrastructure investments and M&As. The Bank of Thailand prohibits banks from lending more than 25% of their capital to a single corporate/group.

If they want to lend more than 25%, they would need extra capital. To prepare for rising demand from large corporates, especially for M&As, banks may decide to keep capital.