Devil in dividend detail for banks in wake of APRA advice

APRA’s revised guidance on bank dividends has drawn mixed reviews from analysts.

APRA chairman Wayne Byres. Picture: NCA Newswire

The prudential regulator’s revised guidance on bank dividends has drawn mixed reviews, with analysts uncertain about some of the details and noting that the devil was often in the detail.

Citi bank analyst Brendan Sproules said APRA’s move to allow banks to pay up to 50 per cent of their earnings in dividends over the remainder of this year raised questions about the definition of earnings, intersecting time periods and stress test requirements.

This was likely to result in variations in dividend forecasts.

However, Mr Sproules said the new guidance was a “welcome boost” for the sector.

“It’s a positive development (because) sustainable dividend yields are a key underpinning to valuations,” he said.

Credit Suisse analyst Jarrod Martin agreed, noting the new policy had switched from serious consideration of dividend deferrals to “maintaining caution”.

Certainty, he said, was better than uncertainty.

While Credit Suisse cut its second-half dividend forecasts for the major banks, the investment bank lifted its target prices due to greater dividend certainty, maintaining outperform ratings for ANZ Bank, National Australia Bank and Westpac, and a neutral rating on Commonwealth Bank.

Mr Sproules said CBA, Bendigo and Adelaide Bank and NAB had paid interim dividends, which would influence their second-half distributions under the new guidance.

Citi forecast that CBA would pay a 50c second-half dividend (up from its previous forecast of zero) after benefiting from asset sales, with Bendigo unlikely to make any payment and NAB expected to match its interim payment of 30c a share.

Bank of Queensland, ANZ and Westpac would see “significant dividend upgrades” after deferring their interim payments.

ANZ, according to Citi, would pay a single, 70c dividend for 2020, with Westpac handing out 60c a share and BoQ 18c a share.

UBS analyst Jon Mott said the new guidance raised as many questions as answers, and left the banks in an awkward position.

“With the exception of CBA, all trade below book value,” he said.

“Should the boards declare dividends from retained earnings during a recession, then actively raise equity to offset these dividends at a discount to book value?

“This would be dilutive to share-count and earnings per share.

“While we believe the banks will acknowledge it is economically irrational to pay dividends and simultaneously raise equity below book value, we assume they may do so anyway.”

In response to APRA’s new guidance, Mr Mott cut his second-half dividend forecasts for CBA ($1.50 to 95c) and Westpac (50c to 40c).

ANZ and NAB were unchanged at 40c and 35c respectively.

Goldman Sachs analyst Andrew Lyons said APRA’s new guidelines were constructive, providing the banks with more flexibility to resume paying dividends.

Mr Lyons cut his second-half dividend forecasts for the big four and the two regionals - Bank of Queensland and Bendigo and Adelaide Bank - so their payout ratios were consistent with the new guidance.

Goldman assumed all six would increase their use of dividend reinvestment plans for their upcoming second-half results.