Source : THE AGE NEWS
One of the biggest reasons “mum and dad” investors flock to Australian bank shares is the bumper dividends: the billions of dollars paid out to hundreds of thousands of shareholders every six months.
The big four banks between them paid $23 billion to investors big and small last year, and they account for almost 30 per cent of all dividends on the ASX 200. In our market, only mining titans – BHP and Rio Tinto – rival the big four for how much money they shower on their shareholders.
Bank shares are known for their dividends, but some analysts say these payments are unsustainable.Credit: Dominic Lorrimer
These torrents of cash have made bank shares the bedrock of many small investors’ portfolios, especially those investors who want income from their shares, such as retirees.
However, the latest round of bank profit results sparked a genuine discussion about whether banks can keep the dividend cash flowing at this rate (with the exception of CBA, whose dividend is seen as safer). Some veteran bank-watchers are asking: do some of our biggest banks need to cut their highly prized dividends?
Such cuts would be unusual if they occurred outside a recession – which is normally what causes banks to reduce dividends – but not unprecedented. National Australia Bank cut its dividend in 2019 under acting chief executive Phil Chronican as it emerged from a bruising banking royal commission that left it with higher costs and a clean-out of its senior ranks, for example.
But there’s no banking crisis at the moment, so why are bank dividends on the agenda now? Mainly because banks’ profit growth has been solid rather than spectacular. And that doesn’t look like changing.
A particular weak spot for much of the industry is retail banking – gathering deposits from households and lending money via mortgages, credit cards or personal loans. While this used to deliver banks their rivers of gold, competition from the likes of Macquarie Group these days is whittling away the returns.
Westpac and NAB this month both reported a decline in retail banking profits compared with the September half, while ANZ managed to eke out 1 per cent growth. Some of this weakness is being made up by higher profits in business banking, strong financial market trading activity (which tends to do well in volatile times); or from low charges for bad debts.
“With weak organic capital generation and limited inorganic tailwinds, we expect dividend cuts for ANZ, NAB and WBC.”
Macquarie analyst Victor German
But what analysts call the “fundamentals” – the core business of taking deposits and lending that money to make a profit – are under some pressure. This is evident in the gradual decline in net interest margins which compare the funding costs of the banks with what they charge for loans. Interest rate cuts, which are anticipated this week, are only expected to result in a further squeeze on these margins.
This slow growth in bank profits is coming at a time when the targets that boards use as a guide when paying dividends – known as dividend payout ratios – are already “stretched.”
Macquarie analyst Victor German, who is forecasting dividend cuts from ANZ, National Australia Bank and Westpac, said the key positives for banks from their recent numbers were low bad debts, and profits from the banks’ markets businesses. The negatives, he said, were the soft margins and weaker capital (which refers to the shareholder funds banks hold to help them absorb losses, and which affect how much they can pay as dividends).
“With weak organic capital generation and limited inorganic tailwinds, we expect dividend cuts for ANZ, NAB and WBC,” German says.
Other analysts are not going as far as to predict dividend cuts, but they say things are getting tight.
Barrenjoey’s Jonathan Mott pointed out Westpac’s dividend payout ratio was at the top of the board’s target range, even though it had very low bad-debt charges.
Sustaining the dividend “looks challenging” even if the very low bad-debt charges normalise even modestly, he said. Even so, he said the board will be highly reluctant to cut dividends: Mott thinks it’s more likely the bank will run down its capital ratio in coming months.
Morgan Stanley’s Richard Wiles said ANZ had “less flexibility” on dividends, pointing to a decline in its capital ratio. While not forecasting a cut, he expected the bank’s dividend payout ratio to stay above 70 per cent, which he said increased the chances of a cut in the next two years.
One investor said that in the case of ANZ, NAB and Westpac, it wouldn’t take a big change in circumstances for the banks to face pressure to cut their dividend. For example, dividends could come under pressure if credit growth picks up more quickly than expected (requiring capital to help fund loans), or if bad debts pick up more than expected.
Whatever happens to bank dividends, the clear message for shareholders is not to expect much in the way of dividend growth from ANZ, NAB or Westpac.
And what about the industry giant, CBA? The market thinks it is less exposed to these pressures, which is one reason why the bank’s shares are up more than 10 per cent this year and hit record highs last week.
But while CBA is seen as the standout Aussie bank, many finance pros still can’t make sense of its massive $284 billion valuation. Indeed, Mott last week said the bank’s share price was “disconnected from reality” and “trading in bubble territory”.
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