Coronavirus economic downturn dashes bank dividend hopes, says UBS

Bank dividends could plunge by up to 40 per cent this year and might even be suspended, UBS warns.

With the economy slowing and unemployment rising sharply due to the COVID-19 virus, the banks are being hit by both a sharp rise in impairment charges and falling net interest margins, UBS warned. Picture: Sarah Marshall

Bank dividends could plunge by up to 40 per cent this year and might even be suspended if the current economic downturn deteriorates or lasts longer than expected, UBS analysts have warned.

ANZ, Westpac and NAB will each slash their interim and final dividends to $50c per share this year, while CBA, which reports on a different cycle to the other majors, will cut its final payout to $1.60 per share and next year’s interim dividend to $1.40, the analysts led by Jonathan Mott said in a note on Tuesday.

But with ANZ, NAB and Westpac now trading below book value for the first time since 1993, the banks are now fair value, they told clients, as they retained a neutral rating on the sector.

“However, should the current economic deterioration turn out to be materially worse than our current expectations we believe share prices could fall further,” they said.

Alongside expectations of an impending dividend hit, UBS has also cut its earnings per share forecast by an average 35 per cent. It is the third such EPS downgrade of the sector by UBS in a month.

With the economy slowing and unemployment rising sharply due to the COVID-19 virus, the banks are being hit by both a sharp rise in impairment charges and falling net interest margins, UBS warned.

“With interest rates entering ultra-low territory, the ability of the banks to generate a lending spread and return on equity is challenged.”

Banks will likely use bad debt overlays starting from the upcoming first-half results, but determining the overlay required would be “challenging,” Mr Mott said.

ANZ, NAB and Westpac are each due to report half-year results in May.

“If a bank is seen to provide too little for bad debts and not cut dividends sufficiently, the market may perceive the bank as imprudent.”

“However, if it is seen to be providing too much and cutting dividends too far, the market may be equally as shocked,” he warned.

Looking to the market for an “unbiased” estimate, he noted the 10 per cent dividend yield ANZ is currently trading at, based on last year’s payout.

“Clearly the market does not believe its dividend is sustainable,” he said.

“We estimate the market is pricing in a 6.0-6.5 per cent yield, which would indicate an expected dividend of $1.00 for fiscal 2020 (50c in the first half).”

Using a 70-75 payout ratio, this implies an overlay of around $1bn to $1.5bn for the first half, Mr Mott told clients. This is in addition to an underlying credit charge.

He also raised the prospect of banks and regulators agreeing on a range of economic scenarios for the months ahead in order to avoid one of the lenders being seen as an outlier with its assumptions.

“This would help avoid a situation where one bank may stand out as being perceived as overly optimistic or negative,” he said.

Share prices in the big four banks have been slammed in recent weeks amid fears of a surge in bad debts and vanishing dividends.

To date, ANZ is down 40 per cent from its February high to $16.32, CBA has tumbled 32 per cent to $61.87, NAB has shed 41 per cent to $16.13 and Westpac is down 38 per cent at $16.10.