MARKETS | Roxanne Uy, China

Will slashing shareholder dividends improve the Big Four's profitability?

Reports say China's Big Four banks may reduce their dividend payout ratios by five percentage points to 35%.

According to the report, the official China Securities Journal said the move was being forced on the Big Four by China’s weaker economy that some official sources now say might grow by only 7.4% in the third quarter from 7.6% in the second.

But is slashing shareholder dividends the best way to improve profitability? What could be the pros and cons of this move for the bank itself and its shareholders?

Standard & Poor's: Liao Qiang, Director, Financial Services Ratings
We believe the dividend payout cut is not for improving profitability but for enhancing capitalization. We see this move as being conducive to the banks’ credit profiles because we assess the leading banks’ capitalization as ‘moderate’.

Fitch Ratings: Mark Young, Managing Director and Head of Asia Pacific Financial  Institutions
Dividend cuts are clearly an option, but unless there is a major deterioration in the environment, I would think bank management would find it hard to justify cuts to shareholders. If the growth prospects remain reasonably positive, raising new capital can be achieved by issuing scrip dividends, issuing other types of capital instruments such as hybrids and tier-2 capital and then lastly issuing new shares.

Relative to other parts of the globe Asian banks capital positions look quite good. That said, some larger markets do look on the thin side given current risks and the potential downside such as China or in the context of meeting Basel III requirements and ongoing growth such as India.

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