Investors hoping that the big banks will restore their dividends sooner rather than later are likely to be disappointed, as the earnings pressure on the banking sector will continue into the 2020/21 financial year.
The banks’ March-half earnings (December-half in Commonwealth Bank’s case) fell by an average of 33 per cent, driven by big increases in credit impairments and a number of one-off provisions and charges. In one case, Westpac, the credit impairment charge was at the level of the global financial crisis.
ANZ, NAB and Westpac are all struggling to maintain market share in their core home lending businesses, and ANZ and Westpac have admitted to back-office problems that are slowing loan approvals and processing.
The banks’ capital positions (measured as common equity tier 1 capital rations) have weakened and the regulator, the Australian Prudential Regulation Authority, has made it clear that strong capital is a priority over the payment of dividends.
Macquarie Securities has forecast that ANZ, which deferred a decision on declaring an interim dividend, will pay a total of 35 cents a share this financial year and 70 cents in 2020/21. The bank paid out $1.60 a share in dividends in 2018/19.
Macquarie expects that Commonwealth Bank, which paid an interim dividend of $2 a share, will pay a total of $3 a share this financial year and $3 in 2020/21. CBA paid a total of $4.31 a share in 2018/19.
NAB, which declared an interim dividend of 30 cents a share, is expected to pay a total of 60 cents this financial year and 60 cents in 2020/21. NAB paid a total of $1.66 in dividends in 2018/19.
Westpac, which deferred a decision on declaring an interim dividend, is expected to ay 40 cents a share in the current financial year and 80 cents in 2020/21. Westpac paid a total of $1.74 in dividends in 2018/19.
If Macquarie’s forecasts are on the money, shareholders will suffer a 78 per cent fall in their dividend income from ANZ from 2018/19 to the current financial year, a 30 per cent fall in their dividend income from CBA, a 64 per cent fall in their dividend income from NAB and a 77 per cent fall in their dividend income from Westpac. The 2020/21 financial year will see some improvement but not much.
At ANZ’s investor briefing, chief executive Shayne Elliott was asked how the bank would come to a decision about paying a dividend. He says the bank will provide an update in August but was not able to say whether or not a dividend would be paid.
The Australian Prudential Regulation Authority has told the banks it expects them to limit discretionary capital distributions, including dividends, “in the months ahead” to ensure they maintain capacity to continue lending.
APRA wants ADIs to use stress testing to inform their views about their need to preserve capital.
“During this period, APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer,” the regulator says.
Elliott says the bank’s board had not set any specific variables that would determine whether or not the dividend would be paid.
“We will know more in August about the economy, about our customers and about government and regulatory approaches. I can’t give an assurance that we will pay a dividend. It is all about the forward outlook for the business and our capital strength,” Elliott says.
Elliott says the bank has no plans to use its capital buffer and operate with a common equity tier 1 capital ratio below 10.5 per cent. However, the bank would allow for the possibility as a short-term measure.
The banks must maintain a minimum common equity tier 1 capital ratio of 8 per cent but APRA has set a benchmark of 10.5 per cent for banks to be regarded as “unquestionably strong”.
Asked if the bank could pay a dividend if it went into the buffer, he says there is no black and white rule. “It would depend on our plans and what our expectations are for generating capital,” he says.
Coverage of the big bank big banks’ results has been dominated by reports of huge jumps in credit impairment charges and one-off provisions, such as Westpac’s $900 million provision in relation in relation to a possible penalty for breaches of anti-money laundering rules.
However, a long-term worry for three of the banks is their weak performance in home lending, which accounts for about 40 per cent of their assets and is an increasingly important driver of earnings as they divest businesses such as financial planning, life insurance and asset management.
Westpac’s Australian housing loan portfolio fell by 1 per cent to $445.7 billion during the March half.
The bank’s chief executive Peter King says: “It is an operations issue. In the short-term, we need more people. In the long-term we need more automation.”
ANZ and NAB have also lost ground in this key market. The banks need strong growth in core business segments to generate capital to keep the regulators happy and generate dividends to keep the shareholders happy.