Westpac should cut dividend, says broker CLSA

Westpac should slice its dividend at its next results and consider taking the chance to raise equity, says broker CLSA.

Westpac CEO Brian Hartzer delivers the bank's first half results in May. Pic: James Croucher

Westpac should slice its dividend at its upcoming results and consider taking the chance to raise equity while the market’s valuation of the bank remains healthy, according to broker CLSA.

As three of the big banks prepare to rule off accounts for the year to September 30, CLSA analyst Brian Johnson told clients that Westpac should do the “sensible thing” and cut its final dividend to 80c, down from the interim 94c payout.

“It makes little sense to maintain a higher dividend if that increases the capital shortfall,” he told clients.

ANZ cut its first half dividend, while Commonwealth Bank — the only big bank with a June 30 year — held its annual payout flat for the first time since the global financial crisis.

After being forced to increase their mortgage capital requirements last year, the banks are bracing for the final release of global changes known as Basel IV around the end of the year. With the local banking regulator also having to implement the final planks of the financial system inquiry, analysts are concerned the banks are facing a multi-billion dollar capital shortfall.

Mr Johnson said Westpac (WBC) should not “squander the opportunity” to get the jump on looming regulatory changes and raise capital at its current valuation of 1.7 times book value.

In separate analysis to clients today, Morningstar forecast Westpac to raise $5.5 billion in the next three to four years. CBA would require a larger $6bn while ANZ and National Australia Bank needed $4.5bn each.

But Morningstar analyst David Ellis argued the banks could raise the capital by retaining more of their profits, selling assets and use of their dividend reinvestment plans.

“We do not forecast large ‘one off’ on market capital raises in 2017,” he said.

But he conceded the banks would have to reduce their dividend payout ratios from 75 per cent this year to 71 per cent by 2020.