Dividend reinvestment plans a way for banks to boost capital

Dividend reinvestment plans (DRPs) being announced by banks is seen as a means to beef up capital on their balance sheets ahead of Basel III requirements.

Analysts said the issuance of DRPs by banks would also be a quick way for banks that need additional equity to match strong growth of loans and to pay for future acquisition plans but analysts expect such schemes to cease or be minimised once capital ratios have been strengthened.

Malayan Banking Bhd on Thursday announced the issue price of new Maybank shares to be issued pursuant to its second DRP was fixed at RM7.70 a share.

The issue price was based on the five-day volume weighted average market price of RM8.80 per Maybank share.

The first DRP by Maybank was seen as a success as the reinvestment rate was at about 89%. The discount in the price of new shares to the market price of Mayabnk would also be a sweetener for shareholders and analysts expect a large number of investors to plough back their dividends into the second DRP scheme.

Apart from Maybank, RHB Capital and AMMB Holding Bhd have also announced their own DRP. As for RHB, analysts said strong loans growth and the future cost of buying PT Bank Mestika Dharma in Indonesia was necessitating the need to preserve as much cash as possible.

Not all banks, however, will be looking at the DRP route.

Analysts feel CIMB Group Holdings Bhd, which has raised quite a bit of cash in the past to boost their capital, is not expected to go down that route as the bank has more than enough cash on its books.

So much so, CIMB in November last year declared a special dividend of RM1bil to shareholders.

The need to have more cash and not hybrid debt as core capital would see some banks think of other ways of adding fresh equity onto their books.

Analysts have noted that Public Bank, which has scaled back their dividend payments recently from the high payout ratios of the past, was doing that to preserve more cash in order to meet future Basel III capital requirements.

Analysts said Public Bank would probably conduct a rights issue instead of a DRP to beef up capital once there is more clarity on the counter cyclical buffers under Basel III is revealed in the future. - By JAGDEV SINGH SIDHU of jagdev@thestar.com.my