Cloudy future for struggling banks as investors’ dividends get slashed
Big bank profits are down and they’re paying less cash to shareholders. This is what impact it will have on millions of mums and dads who’ve put their money with them.
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Disappointing profit reports by big four banks have left investors wondering whether it’s worth putting their money into these corporate giants.
Bruised by the financial services royal commission fallout, lower interest rates and tougher regulators, this week Westpac and NAB slashed their dividend payouts by 15 and 16 per cent respectively.
That came just days after ANZ cut its dividend franking level to 70 per cent, reducing tax benefits for its shareholders.
Sharemarket analysts say the bad news could continue and the Commonwealth Bank, which runs on a different financial reporting calendar, could also cut dividends in February.
However, they say the big four remain among Australia’s strongest companies and highest dividend payers.
Customer remediation costs – bank-speak for paying back money to financial advice clients who were ripped off – have dented big bank profits, and Baker Young Stockbrokers managed portfolio analyst Toby Grimm said low interest rates had also shrunk profit margins.
“Our view is that they’re good investments and they have proven that over time – they’re working their way through the current issues,” he said.
“The caveat is there could be more bad news in the short term.”
Banks have been selling off their wealth and insurance businesses and reducing their overseas operations. “They have pretty much shrunk themselves back to the core of what they do,” Mr Grimm said.
“They have capacity to cut costs in the medium term. Yields are still attractive compared to what else is out there so there’s going to be demand for their shares.”
Big bank dividend yields are still 5-6 per cent despite the latest cuts.
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Bell Direct market analyst Jessica Amir said the yields were much higher than the overall sharemarket’s 3.6 per cent “which is why they’re still sexy” and older Australians had an affinity for big banks.
However, Bell Direct preferred fellow financial stocks such as Macquarie or Suncorp, or other strong dividend-paying shares and sectors, Ms Amir said.
“Think outside the square – don’t just go for the big four banks,” she said.
“They are being squeezed. We only like companies that are growing their dividends.”
A report by Deloitte says combined annual cash profit for the major banks has fallen almost 8 per cent to $26.9 billion, and forecasts their $6.8 billion total refund and remediation bill since 2017 to increase.
Deloitte capital markets and treasury partner Steven Cunico said it was a “poor result”.
“Even if you get rid of all the noise around customer remediation and big ticket items, the picture is a little bleak,” he said.
“I wouldn’t say the worst is behind us just yet … but they’re strong businesses, they’re well capitalised and they’re much safer than they were before, which is good.”
Mr Cunico said there probably was more bad news to come but it was unlikely to last more than 12 months.
SMALLER DEPOSITS TO SHAREHOLDERS
NAB cut final dividend from 99c to 83c
Westpac cut final dividend from 94c to 80c
ANZ reduced franking on its 80c dividend from 100% to 70%
CBA to report its next profit in February 2020
Originally published as Cloudy future for struggling banks as investors’ dividends get slashed