Analysts warn banks against equity raisings to pay dividend

Investment firms remain cautious whether dividend deferrals by major banks will be enough.

Equity analysts have warned the big banks against raising capital to pay dividends, as the market questions whether the sector will heed of the banking regulator’s suggestion to suspending dividend payments.

Morgan Stanley analysts said only two realistic scenarios are available to the big banks on their dividend policies. Banks could initiate a reduced dividend payment discounted by 40 to 60 per cent, underwritten by dividend reinvestment plans. Alternately, they could fully defer payments with no guidance on when dividends would resume.

“Dividend suspension seems more likely at NAB and Westpac than ANZ given their lower capital ratios and new leadership,” Morgan Stanley analysts said.

But UBS analysts said major players should be conserving capital in an attempt to avoid potential equity raisings and dividend reinvestment plans which would dilute shareholder value.

“Returning capital through dividends, then raising it back via dividend reinvestment plans at a discount to book is economically irrational and highly dilutive,” UBS said. “Further, bank dividends should never be viewed as an annuity, irrespective of the wishes of some retail investors.”

UBS assumes ANZ will not pay an interim dividend, but will pay out 50c per share in the second half of its financial year.

UBS anticipates NAB and Westpac will not to pay dividends due to weaker capital positions and to ward off future equity raisings. It said new share issues could be launched if conditions continue to deteriorate.

ANZ is scheduled to announce its half yearly report on April 30, while Westpac’s interim results are scheduled to be made public on May 4. NAB will hand out its results on May 7.

Gerard Cockburn