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Companies under pressure to raise cash dividends
By Sally Yim, Hu Bin and Hu Kai |
January 17, 2013, Thursday
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Print Edition
Print Edition
SHANGHAI Stock Exchange last week published a guideline which encourages companies to make high dividend payouts. Such encouragement is credit negative for Chinese banks and insurers because it will hinder their ability to retain profits to support their strong loan and premium growth. It is also credit negative for non-financial companies because it will erode their liquidity cushions.
The guidance states that if a listed company opts to pay less than 30 percent of its earnings in cash to shareholders, it must justify to regulators the low cash dividend payout ratio and explain the proposed use and expected benefits of the retained profits.
The guidance also grants expedited processing of secondary offering and merger-and-acquisition applications for listed companies with cash dividend payout ratios above 50 percent.
The effects of this guidance would be most pronounced for insurers because the capitalization of listed Chinese insurers has been under pressure owing to their high premium growth and relatively weak earnings.
In addition, many insurers have issued subordinated debt to replenish solvency capital and are approaching their upper regulatory limit. This guidance will further restrain their flexibility to retain equity capital to fill the gap left by slower sub-debt issuance.
Life insurers, whose earnings have deteriorated because of the large impairment charges they took as a result of poor performance of the A-share stock market in 2012, are pressured more than property and casualty insurers.
The guidance will also undermine listed banks' ability to retain earnings to strengthen their capital adequacy, thereby limiting their organic growth.
There are 17 listed commercial banks in China, 14 of which are listed on Shanghai Stock Exchange.
Small banks will take the biggest hit because they are more in need of capital. Although they now face a difficult environment to raise additional capital, their strong profitability provides them with an important and reliable source of capital through earnings retention. However, this guidance will undermine their ability to do so since it puts pressure on them to raise their currently low payout ratios.
Large banks
The guidance will also affect large banks. Dividend payout ratios of the big three banks ran as high as 50 percent back in 2008, but were cut to 35 percent last year by their largest shareholder, Central Huijin, the Chinese government's investment arm. This has helped support these banks' growth and provided them with more capital planning flexibility. However, the new guidance will discourage further cuts in dividend payouts by these banks.
For corporates, the guidance provides incentives to pay out more dividends, reducing the excess cash they might otherwise hold for future opportunistic investments or as a liquidity cushion.
Nevertheless, the new guidance could help improve information transparency on companies' dividend policy, usage of their funds from initial public offerings or retained earnings, and the performance of their investment projects, if they opt to maintain a low dividend payout ratio.
Sally Yim is a senior credit officer, and Hu Bin and Hu Kai are senior analysts of Moody's Investors Service. The opinions expressed are their own.
The guidance states that if a listed company opts to pay less than 30 percent of its earnings in cash to shareholders, it must justify to regulators the low cash dividend payout ratio and explain the proposed use and expected benefits of the retained profits.
The guidance also grants expedited processing of secondary offering and merger-and-acquisition applications for listed companies with cash dividend payout ratios above 50 percent.
The effects of this guidance would be most pronounced for insurers because the capitalization of listed Chinese insurers has been under pressure owing to their high premium growth and relatively weak earnings.
In addition, many insurers have issued subordinated debt to replenish solvency capital and are approaching their upper regulatory limit. This guidance will further restrain their flexibility to retain equity capital to fill the gap left by slower sub-debt issuance.
Life insurers, whose earnings have deteriorated because of the large impairment charges they took as a result of poor performance of the A-share stock market in 2012, are pressured more than property and casualty insurers.
The guidance will also undermine listed banks' ability to retain earnings to strengthen their capital adequacy, thereby limiting their organic growth.
There are 17 listed commercial banks in China, 14 of which are listed on Shanghai Stock Exchange.
Small banks will take the biggest hit because they are more in need of capital. Although they now face a difficult environment to raise additional capital, their strong profitability provides them with an important and reliable source of capital through earnings retention. However, this guidance will undermine their ability to do so since it puts pressure on them to raise their currently low payout ratios.
Large banks
The guidance will also affect large banks. Dividend payout ratios of the big three banks ran as high as 50 percent back in 2008, but were cut to 35 percent last year by their largest shareholder, Central Huijin, the Chinese government's investment arm. This has helped support these banks' growth and provided them with more capital planning flexibility. However, the new guidance will discourage further cuts in dividend payouts by these banks.
For corporates, the guidance provides incentives to pay out more dividends, reducing the excess cash they might otherwise hold for future opportunistic investments or as a liquidity cushion.
Nevertheless, the new guidance could help improve information transparency on companies' dividend policy, usage of their funds from initial public offerings or retained earnings, and the performance of their investment projects, if they opt to maintain a low dividend payout ratio.
Sally Yim is a senior credit officer, and Hu Bin and Hu Kai are senior analysts of Moody's Investors Service. The opinions expressed are their own.
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