Call for Basel III Dividend Policy Is Credit Positive for Taiwanese Banks

Call for Basel III Dividend Policy Is Credit Positive for Taiwanese Banks

On 8 and 14 February 2012, Taiwan’s Financial Supervisory Commission (FSC) held meetings with the chairmen of all 16 of the country’s financial holding companies. The FSC urged them to prepare their banking subsidiaries for stricter capital requirements under new Basel III rules, attend to long-term capital adequacy planning and set prudent dividend policies when developing their growth strategies.

Despite the lack of any FSC announcement on whether Taiwan will fully adopt Basel III rules, its emphasis on the need for banks to take into account Basel III in determining dividend policies is credit positive. The regulator’s directive will steer banks toward retaining more internally generated capital to strengthen their capital adequacy and support their business growth, especially in relation to expansion in China.
As Exhibit 1 shows, from 2006 until 2009, most of our rated banks distributed more than 50% of their earnings as cash dividends, most of which were up-streamed to financial holding company parents or, where they are state-owned, to the government.

Banks began reducing their cash dividends in view of the need to strengthen capital ahead of the Basel III regime. A number of banks lowered payout to 18%-41% for 2010, including government-related banks such as First Commercial Bank (A3 stable; D/Ba2 stable)5

In addition, despite its role supporting the government’s fiscal budget, Land Bank of Taiwan (Aa3 stable; D/Ba2 stable) significantly reduced its cash dividend payments, lowering payout to 75% for 2010, down from 128% for 2008 and 135% for 2009. The greater earnings retention is particularly important to this bank given its rather weak capital position. and Hua Nan Commercial Bank (A3 stable; D/Ba2 stable), as well as private-owned banks such as Taipei Fubon Commercial Bank (A2 stable; C-/Baa2 stable) and E. Sun Commercial Bank (Baa1 stable; D+/Baa3 stable).

For the system as a whole, we still consider the capital adequacy of Taiwanese banks to be at best average when compared with global peers. As of third-quarter 2011, the system’s Tier 1 capital ratio was 9.05% and total capital ratio was 11.68%. In this context, the regulator’s call amounts to an official endorsement of the trend to diminish cash dividends.

Specifically, the Basel III framework requires banks with a common equity Tier 1 capital ratio below 7% to set aside a specific minimum percentage of earnings according to a stepping scale6 (see Exhibit 2). The FSC’s explicit Basel III reference is therefore particularly relevant to such banks as the government-related Land Bank of Taiwan and Hua Nan Commercial Bank7 that had common equity Tier 1 capital ratio near or below 7% as of third quarter 2011. Before new capital injection, we expect these banks will further reduce their coming earning disbursement, even as that will likely mean the government receives less dividend income from its bank holdings, an important source of fiscal revenue.