Major bank dividend growth to eclipse earnings in 2021: Ausbil

Dividend growth at the major banks will outpace that of earnings this year as the industry unwinds COVID-19 caution and loan loss expectations.

Ausbil Investment executive chairman Paul Xiradis. Picture: Alan Pryke

Dividend growth at the major banks will outpace that of earnings this year and Commonwealth Bank may kick off a round of capital management in the sector, as the industry unwinds COVID-19 caution and loan loss expectations.

That’s the view of Ausbil Investment Management executive chairman Paul Xiradis, who expects further upside in the banking sector in 2021.

He noted the sharp economic rebound — including in employment and confidence — meant the big banks were “over provisioned” for potential loan losses, which reflected expectations of a far worse outcome in March last year.

“It is clear the set of economic assumptions that they applied in coming up with their COVID-19 overlays … were far too extreme and we will see writebacks,” Mr Xiradis said.

“We are seeing this double whammy impact here. There will be a writeback of some of that provisioning that the banks have made but there’s also an adjustment happening in the marketplace, as the provisioning levels that the market has in forward estimates are still way too high and will be adjusted lower.”

Ausbil, which has about $14.1bn in funds under management, also expects a notable increase in bank dividends in the upcoming reporting season in May. But Mr Xiradis — who is also Ausbil’s chief investment officer — doesn’t see dividends getting back to pre-pandemic levels in the near term.

“The payout ratio will trend up higher but I don’t think it’s going to get back to the levels it was before (COVID-19),” he said, noting bank payout ratios may rise to 70-75 per cent.

Limits on dividend distributions were eased by the banking regulator from January 1, as risks stemming from the pandemic receded. Last year, banks were told to defer dividend decisions, then later payments were capped at 50 per cent of profits. “I do expect that the dividend growth over the coming year will be stronger than that of the earnings growth, so there will be a period of catch-up,” Mr Xiradis said.

He also expects significant capital returns from the banks will be back on the agenda, largely via share buybacks.

“The banks are again incredibly well capitalised, far beyond their requirements.”

Mr Xiradis believes CBA — which rules off its year-end on June 30 — may get the ball rolling on capital management initiatives, given the bank is still holding the proceeds of a string of divestments including its life insurance arm.

Morgan Stanley banking analyst Richard Wiles has estimated the big four banks have at least $10.5bn in excess capital between them.

He is anticipating share buybacks will start in the sector in financial year 2022, and that National Australia Bank may provide some clarity on its medium-term capital management approach with its interim results next month.

“We expect a conservative approach to capital management in the near-term, but we forecast buybacks to commence at CBA, NAB and WBC in the 2022 financial year,” Mr Wiles said.

Ausbil’s pick among the big four is NAB, which reflects its largest overweight position, and it is overweight CBA.

“NAB for the first time in a number of years we’re seeing a real marked improvement in the way the bank is being operated,” Mr Xiradis said.

He also noted Bank of Queensland’s earnings result this month showed how lenders were capitalising on lower funding costs and deposit rates, which would persist into 2022.

He expects CBA and Westpac to also benefit from lower deposit rates and repricing, given deposits comprise a larger proportion of their funding mix.

Mr Xiradis did caution, though, of risks to the economic rebound given the slower vaccine rollout, but he said the banks were well positioned to navigate lingering challenges.

On BoQ’s $1.325bn purchase of ME Bank, Mr Xiradis said it appeared sensible but would come down to how the integration was managed.

With debate firing up again on a potential sale of Suncorp’s bank, he wasn’t convinced a transaction would occur in the short term.

“There’s been a lot of talk over many years about Suncorp. There is good appetite for it if they do put it up for sale … but I’m not holding my breath,” Mr Xiradis said.