Investors left wondering on bank dividend outcome

money

In directing the banks to cut dividends, the prudential regulator has attacked a sacred cow.

Bank dividends are the backbone of shareholder portfolios in Australia.

Literally, a third of all dividends issued on the S&P/ASX 200 come from the big four banks: ANZ, CBA, NAB and Westpac.

Less than a year ago the Coalition won a federal election partially due to its rejection of the Opposition’s plan that would have cut payments to retirees relating to franked dividends.

Millions of investors - and the majority of the nation’s self-funded retirees - rely on franked dividends as a key component of retirement income. The biggest source of that income is bank dividends.

Even in the depths of the global financial crisis (GFC), our big banks only reduced dividends - in the worst cases by 25 per cent. They did not suspend them, but this is now a distinct possibility.

So how much will the banks cut by? The reality is that dividend cuts were coming anyway so the question really is which bank would drop its dividend entirely?

Opinion is divided. The stockbroker Morgans suggests: “Our base case is that all banks that normally declare a dividend in April or May - Bank of Queensland, ANZ, NAB and Westpac - these banks will suspend the next dividend.”

Morgans does not rule out a less extreme scenario, but if the “suspension scenario” turns out to be true, it will be historic.

At JPMorgan, the investment bank is forecasting bank dividend cuts of 50 per cent across the board.

However, a close reading of the surprise directive to the banks from the Australian Prudential Regulation Authority suggests there will be wriggle room, because though the regulator expects “material reductions” in dividends, the banks can justify dividend payments if they pass so-called “stress tests”. Moreover, Wayne Byres, the chairman of APRA has indicated the temporary nature of the regulator’s efforts telling The Australian he expects the directive to be relevant for “a few months”.

Some fund managers even suggest Commonwealth Bank, the strongest of the majors, might persuade the regulator it does not need to cut dividends at all.

In the last dividend payments cycle, CBA was the only big four bank not to cut dividend payments. If it can repeat that under these conditions, the gap between CBA and the rest of the sector might become insurmountable.

CBA also has the advantage that its next dividend payment is not until August (it operates on a different reporting calendar) while the rest of the banks face the decision in April or May.

Don Hamson who runs a specialist income fund at Plato Investment Management says: “To a large extent, even before the APRA statement, investors were braced for dividend cuts - it may be one of the reasons the sell-off in bank stocks on the ASX after the decision was quite restrained.”

At the close of business on the ASX on Wednesday - with the wider market little changed - the banks fell by up to 5 per cent at NAB and Westpac, 4 per cent at ANZ and 3 per cent at CBA.

Separately, bank hybrids - which dominate the hybrid market in the same way the banks dominate the sharemarket - are also in the firing line as income payments in this sector are also now in jeopardy.

Financial advisers suggest many retail investors will now find themselves in the unusual situation of looking to the major miners as a key source of dividend income this year. After the banks, the miners are the biggest dividend payers.

Last year after bumper profits, BHP was the biggest single dividend payer in the local market.

Just now with CBA on a forward yield of more than 6 per cent, BHP and Rio Tinto are offering almost identical dividend forecasts to our biggest bank.