National Australia Bank’s results shed light on two key points; dividend payout ratios are being reined in to more sustainable long-term levels and the bank expects a business lending bonanza over the next 18 months.
The level of earnings that banks pay out as dividends has long been a fierce topic of debate among boards and investors, and COVID-19 has provided a catalyst to make change. Regulatory guidance capped dividends in 2020, but in 2021 the banks are exercising caution and conservatism in their dividend declarations, mainly citing lingering risks from the pandemic.
If the economy continues on the strong recovery trajectory multibillion-dollar capital returns – through share buybacks – will be a feature of the final months of 2021. Commonwealth Bank, ANZ, Westpac and NAB are all sitting on capital levels well above the banking regulator’s “unquestionably strong” threshold of at least 10.5 per cent, in part due to a divestment spree of non-core assets.
While NAB boss Ross McEwan may be somewhat rueing the decision at the height of the local COVID-19 turmoil last year to raise $4.25bn, focus has now shifted to when the bank can pull the trigger on a share buyback.
“With hindsight (on the 2020 capital raising) you can always be smarter, but it has set this bank up for a much better capital level for growth going forward,” he told this column.
“Normalised our dividend payout ratio should be somewhere between 65-75 per cent … we were pushing well over 80 per cent pre-COVID which I think was straining the bank.
“We were constantly then diluting our shareholders by issuing more shares to pay the dividend and I wanted to get us off that cycle as well, so now we are back into a very strong position.”
NAB’s first-half payout ratio printed at 59.1 per cent, ANZ came in at 67 per cent and Westpac 60 per cent, for this season’s round of profit reporting.
Separately, McEwan and NAB are expecting higher business confidence levels to start translating into a marked lending and investment uptick over the next 18 months. For the 12 months ended September 30, NAB tips business lending will turn positive to come in at 0.6 per cent growth. Then in the following year, activity really ramps up to 4.2 per cent.
That’s a big call given on the Reserve Bank’s latest data business lending was going backwards by 2.6 per cent in the year ended March 31.
McEwan says the momentum is already building for a strong period ahead for business lending and investment, so watch this space.
“We are starting to see that now … our March was very strong and I can say that April is equal to, if not greater, than the March monthly change. It’s starting to come through, confidence is there.”
He adds the strength is broadening from the agricultural sector and regional Australia to many other industries, and confidence tends to take six to 12 months to flow through into bank pipelines.
Being the largest biggest bank in the domestic market, NAB gives the clearest picture of the health of the economy’s engine room.
Its results showed industries including aviation and parts of commercial property were still doing it tough.
Westpac’s woes
Westpac’s latest regulatory run-in with the corporate regulator has been in the works for several years, but hit the bank just as it and chief executive Peter King were starting to come up for air.
This column understands Westpac was expecting legal action but was somewhat surprised by the insider trading angle to the proceedings.
Many of those in-and-around the action have been subject to formal section 19 mandatory examinations, under the Australian Securities and Investments Commission Act 2001. Law firm Allens is said to be working through the concise statement of claim with Westpac to determine whether to fight the action.
ASIC hit the bank hard on Wednesday by starting civil proceedings for insider trading, unconscionable conduct and breaches of Westpac’s Australian financial services licensee obligations. The allegations stem from Westpac’s role in executing a $12bn interest rate swap transaction jointly with AustralianSuper and IFM, linked to their 2016 purchase of a majority stake in electricity provider Ausgrid.
Westpac’s response will be interesting given the bank’s legal advice suggesting the case relates to grey areas of relevant legislation and market practice that is deemed common in some quarters. The settlement versus a drawn out court case debate will no doubt be in full swing.
Former Westpac institutional boss Lyn Cobley is entangled in the case. Others who allegedly knew some or all of the Ausgrid information included Nicholas Allen, Benjamin Mitchell and Shane Dorman on the derivatives trading desk, fixed income boss Simon Masnick, and then managing director of corporate and institutional distribution and origination in markets Michael Correa.
University of Sydney Business School associate professor Juliette Overland has pointed out there have only been two insider trading cases brought against companies in Australia.
She pointed to an unsuccessful civil case against Citigroup in 2006, and a civil case against Hochtief in 2016, where the construction group admitted liability and received “a comparatively small fine” of $400,000.
“Insider trading cases are rarely brought against corporations as a whole – individuals are the most likely targets of a prosecution for insider trading, and the vast majority of offenders plead guilty once their trading is detected,” Overland said.
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