NZ move fans angst over bank dividend outlook

A freeze on bank dividends in New Zealand fuelled anxiety about the outlook for dividends in Australia.

After opening down 3.7pc, the S&P/ASX 200 pared much of its decline, closing down 2pc at 5154.3 on Thursday

Battered investors recoiled from the sharemarket again as heightened concern about the coronavirus pandemic sparked another dive on Wall Street and a freeze on bank dividends in some offshore jurisdictions fuelled anxiety about the outlook for dividends in Australia.

After the worst quarter for global equities since 2008, the June quarter started badly with US benchmarks down 4.4 per cent after President Donald Trump warned of as many as 240,000 US deaths in the coming few weeks, US intelligence claimed China concealed the true extent of its epidemic and sharp falls in the new orders and employment components of the US ISM manufacturing data.

But after opening down 3.7 per cent at a two-day low of 5065.2 points, Australia’s S&P/ASX 200 pared much of its decline, closing down 2 per cent at 5154.3.

It was the smallest fall in several weeks of extreme volatility amid the global COVID-19 crisis.

The consumer discretionary sector rose as G8 Education surged 29 per cent after the federal government said the childcare system will be overhauled from Sunday night for at least six months to offer children and their parents free early education during the coronavirus pandemic.

The energy sector also gained with Santos up 5.9 per cent amid a jump in crude oil prices

Brent crude later surged as much as 14 per cent to a six-day high of $US27.13 a barrel after Bloomberg reported that China told government agencies to start filling state stockpiles. Crude had plunged 66 per cent in the first three months of the year as demand slumped due to the pandemic and Saudi Arabia raising production.

Support for shares came as S&P 500 futures rose 1.7 per cent after US Fed allowed banks to take on more leverage to ease strains in the bond market and increase banks’ ability to provide credit to households and businesses.

“The Fed is once again in full ‘whatever it takes’ mode,” said Elsa Lignos of RBC Capital Markets.

RBC’s US Equity Investor Survey of 185 institutional investors found respondents were “highly bullish on stocks” due to a belief that “valuations are attractive” and “faith in the Fed”.

“Our respondents give the Fed high marks for their emergency measures and think monetary policy will stay supportive of stocks for quite some time and believe that the economic damage from the public health crisis will be manageable,” Ms Lignos said.

“Most think the GDP hit won’t exceed minus-20 per cent in the worst quarter, and that a recession will end in the December quarter.”

But much of the intraday recovery in the Australian market came from a partial recovery in banks after the Australian Prudential Regulation Authority said dividend decisions were up to their boards.

The four major banks closed down between 3.8 and 5.6 per cent after falling heavily intraday. But while indicating that Australia won’t immediately follow the UK, Europe and New Zealand by freezing bank dividends here, the regulator appeared to leave the door open.

APRA was “actively engaging with banks to understand their intended approach to dividends, as well as other distributions to shareholders or employees, given current uncertainties”, it said.

“For the time being, decisions on dividends and variable remuneration remain matters for boards to determine in line with their obligations under APRA’s prudential framework.”

Analysts said they were already anticipating dividend cuts for most of the banks.

“We have already reduced dividends for most of the banks in our coverage with the exception of ANZ and CBA,” said Bell Potter analyst TS Lim.

“ANZ has the lowest payout ratio plus surplus capital from divestment and we think they will still be able to maintain dividends. Similarly CBA has excess capital from recent divestments and this sets these two banks apart from NAB and Westpac.”

Don Hamson of Plato Investment Management predicted a 30 per cent cut to dividends from Australian equities in the next 12 months, with “significant cuts” likely by banks. “It is our belief that smaller banks will be hurt more than larger banks, due to thinner margins and narrower funding avenues,” he said.

It came as Moody’s cut the outlook for Australian banks to negative from stable, citing risks around their operating environment and loan performance.

“Pressure on profitability will increase,” Moody’s Vice president Francesco Mirenzi said.

“Loan-loss charges will increase and revenue will decline as net interest margins narrow in the low interest-rate environment.”

He added that the NZ dividend ban would restrict capital accumulation for the major lenders.

ANZ said that the RBNZ’s restrictions would prevent its scheduled redemption of $NZ500m ($488m) capital notes on May 25, but it would maintain interest payments on the notes.

CBA said it had strong surplus capital and was “well placed to absorb” the suspension of New Zealand dividends, while NAB said the restrictions wouldn’t have a material impact on its capital position.

Prime Minister Scott Morrison ruled out any changes to franking credit rules to help pay for the $205bn in fiscal support packages announced over the past month. “No, we’re not reconsidering franking credits,” he said.