“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.
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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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