Noble: Are we all equally at risk? Or are some of us better than others?

EPL Infrafred Sauna

Prime Minister Dr Keith Rowley in his opening remarks to his economic recovery team said: “…Covid-19 has unmasked the inequalities that exist in the economy and at the wider societal level…it has also demonstrated that all segments of the society are at risk.

These sentiments are in line with those of Sir Angus Deaton, 2015 Nobel Prize winner, who in a recent seminar about the post-Covid-19 scenario, asked the question about how to inject money into the economy as a means of reducing the inequalities of our society. He made a specific distinction between providing funds for business versus those who live pay check to pay check.

Image: Covid-19 and the global economy.

It is easy to mouth platitudes, but our actions betray us each time. This time is the turn of the banks with majority shareholdings by the government and/or its proxies. What should be their dividend policy? Whether we are alert or not, these decisions affect us as a nation.

In this context, the lead opinion of the Business Express—which incoherently questioned the dividend decision of Republic Financial Holdings Ltd and its impact on two specific funds, the National Investment Fund and the CLICO Investment Fund—is stunning.

The incoherence stems partially from a lack of acknowledgement that these funds are not widely held. In the former fund, there are less than 8,000 retail investors and in the latter case, the assets were originally for the benefit of former CLICO policyholders, etc, which is less than 15,000 persons.

In the scheme of things, these investors are not your average poor people. Why is the Opinion worrying about the impact on the Funds? Why should their interests be a focus?

The concern may have been better placed, had it been one about the impact on the funds held by The Unit Trust, which has 580,000 individual clients. The relatively small groups of owners, in both these funds, have benefitted from steep asset price appreciation and rich dividends off the back of the same Republic shares.

(We will not pause to remove the scab that placed the shares previously held by the TTEC Pension Funds in this fray.)

Image: Stock market fears.
(Copyright Greg Perry/Toronto Star)

Instead, we point to risk management in a portfolio. More concentration equals more risk. Mama would have said: ‘do not put all your eggs in one basket’.

The questioning of the Republic decision to halve the dividend, on the basis of the effect on these groups, is galling. Shareholding and Unit investment are not risk-free activities.

Risk cuts both ways. The CIF holders, whose fund terminates in 2023, own the second most liquid asset, in terms of value, on the Stock Exchange. They could sell at any moment but would not since it makes sense to keep on the horse until 2023. Why? If you choose to stay the course, then you take the risks.

The NIF business model specifically states its ‘hold to collect’ policy which means that it depends on payment of principal and interest (the SPPI test), not dividends paid out of reserves. Is the Business Express promoting the view that ‘some animals are more equal’?

The decisions by the two banks are worthy of examination. The Opinion describes as ‘unfortunate’ the lack of details about the Republic decision and its TT$368 million additional provision comparing that to the First Citizens’ TT$27 million provision—with no recognition of their past or current impairment policy or portfolio quality differences.

There was no discussion about the risk of the impact on the whole society should anything go awry because of the banks being unable to extend the credit required in these difficult times, or God forbid, they come close to breaching the liquidity rules that govern the banking sector.

Photo: The First Citizens Bank.

The First Citizens Group promoted their dividend decision as ‘recognising the need for a balanced approach out of consideration for our valued shareholders while ensuring organisational sustainability’. As a consequence of that statement, a valid question arises: Is consideration for Corporation Sole, the major shareholder, influencing the Board’s dividend decision for short-term reasons?

As a further context, we should note that in the 2008 short-lived financial crisis, global dividend income fell by 18%. Therefore, we should put aside the simple discussion of whether or not special groups ought to be paid.

We should discuss the dividend policy link with investment in ‘safe assets’ (not to be confused with risk-free assets), be they here or overseas, the implication for capital flight and availability of foreign exchange. This is where the rubber meets the road. What will the beneficiaries, those who are invested in the stock market, do? This is the stuff that Dr Rowley was speaking to.

Increases in stock market wealth tend to increase savings by the rich but have a weak or no correlation with consumption, which requires consumer confidence, and which is needed to bolster the economy. If there is no confidence by those who possess wealth, they have an alternative: they can seek places that offer ‘safe assets’.

There are already reports of global capital flight since the virus arrived. We would be silly to ignore this threat.

It is proven that, in difficult situations, companies which cut their dividends to prioritise liquidity and solvency often recover faster than those who struggle to maintain their dividends. The latter can ultimately destroy shareholder value. The impact on the intrinsic value of a business from a temporary dividend cut is marginal.

Image: An artistic take on capital flight.

Having said this, banks are special cases since they are the cornerstone of the modern economy. The issue of their dividend policies, in recent years, is a fertile research ground (Basse et al, 2014, Abreu and Gulamhussen, 2013).

In March, Financial Times reviewed what is happening to banks in the Covid-19 age and concluded that there is great difficulty ahead. Goldman Sachs has been skittish about their plans to move into the mass market wealth management. Mr Jamie Dimon, of JP Morgan, said ‘mature bank boards would have to look at their dividend payments if the economy worsened dramatically’. If yuh neighbour house on fire…

Facing an enormous uncertainty about the depth of this coming recession and its duration, Corporation Sole will do well to advise us all, including the First Citizens Group, to think long-term. We, as a country, could ill afford a repeat of earlier errors, such as Workers’ Bank and CL Financial.

On each previous occasion, the poor taxpayer paid while others escaped.

(I am directly affected by virtue of my shareholdings in both banks and the NIF.)

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About Noble Philip

Noble Philip
Noble Philip, a retired business executive, is trying to interpret Jesus’ relationships with the poor and rich among us. A Seeker, not a Saint.

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