Commonwealth Bank’s board is at the serious end of talks with regulators about the prospect of paying a full-year dividend, which looks slim.
That means the dividend drought is set to continue. It comes against the backdrop of a second-wave of COVID-19 infections locking down Melbourne, and the banks agreeing to extend loan repayment deferrals for a further four months for those in genuine need.
The lack of bank dividends also compounds the fact that retirees and self-managed superannuation funds are barely earning any interest on deposits and cash stores and will be severely hit.
CBA reports full-year earnings in about a month so the clock is ticking on dividend deliberations. It’s a tricky picture for CBA.
Mum and dad investors account for more than 50 per cent of the bank’s register, which given its heritage, outweighs that of its major rivals.
The Australian Prudential Regulation Authority in April urged banks to “seriously consider” holding off on dividend decisions.
“Where a board is confident that they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level,” the notice at the time said.
Behind the scenes, the regulator has been actively discouraging dividend payments and that stance hasn’t changed. And the renewed COVID-19 infections - and economic hit associated with that - will only make APRA more prudent.
ANZ, Westpac and Bank of Queensland deferred dividend decisions earlier this year, but National Australia Bank declared a 30c interim dividend, slashing the payment from 83c six months earlier. NAB also kicked off a $4.25bn capital raising, which gave APRA some comfort around the dividend.
Bendigo and Adelaide Bank joins CBA with a June 30 annual balance date, while the other major banks have a September 30 year end.
On CBA’s side in its discussions with APRA for paying a substantially reduced dividend is its strong pro-forma capital ratio. The bank has agreed to offload 55 per cent of Colonial First State to private equity giant KKR & Co in a $1.7bn transaction, which is yet to complete.
It has said its common equity tier one ratio was 10.7 per cent as at March 31, following the payment of an interim dividend, which will be well over 11 per cent after that deal and the completion of other outstanding divestments.
Dividends are huge sore point for investors during the pandemic turmoil.
CBA boss Matt Comyn earlier this year made the point that in the six months ended December 31, the major banks contributed 32 per cent of ASX dividends distributed to shareholders.
“The financial consequences (of suspending dividends) directly would be a problem,” he said.
Comyn on credit
Refinancing and renewed interest in fixed-rate mortgages are helping the loan growth of the major banks to hold up.
CBA’s Comyn on Tuesday said the bank had seen “reasonable volumes” across its loan portfolio across small business and housing loans, which have been buoyed by the allure of record low fixed rates and the federal government’s home builder and renovation grants.
“It’s been more robust than we would have expected,” he added.
Comyn also pointed out that up to 40 per cent of home loan customers were opting for fixed-rate mortgages, more than twice the average of the last eight years.
Analysis by Morgan Stanley of the latest Australian Prudential Regulation Authority data showed the average of major bank housing loan growth improved to about 2.5 per cent annualised in May.
The analysis highlighted that CBA continued to lead its big bank peers over this period at 4.1 per cent, even though its growth rate slowed in May.
Platform marriage
This financial year is shaping up to be the one for consolidation in the investment platform sector.
ASX-listed Praemium’s $55.6m cash and scrip takeover of counterpart Powerwrap - some 12 years in the making - was announced on Thursday. The deal will deliver the combined entity more than $27bn in funds under administration, behind the largest independent player Netwealth which after a bumper June quarter had $31.5bn.
Praemium chief Michael Ohanessian told this column there was “industrial logic” in putting the businesses together, particularly as Powerwrap drew on Praemium’s technology. Margins are also under pressure in the sector making scale important.
Ohanessian is a big believer that rationalisation in the industry will occur given there are 30 players in the domestic market.
“It’s only going to go one way,” he said, noting 20 participants should be the “outer limit” in the Australian market.
A platform holds investments, such as managed funds and shares in one place and is used by financial advisers for centralised reporting. Back office, tax and other services are also often provided.
While the Praemium tilt for Powerwrap has the target board’s backing and the acquirer has a large cornerstone stake, some investors are said to be looking for an increase in the bid price.
Shareholders from Escala Partners and SG Hiscock are said to be pushing for a higher Powerwrap offer, while Regal Funds Management is believed to be supportive of the bid in the absence of a higher one.
There is more action to come in the platform sector as Westpac conducts a strategic review of its business, as part of an assessment of the bank’s ownership of superannuation, retirement products, investments, insurance, auto finance and its Pacific unit.
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