Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


How much will bank dividends fall?

Glenn Freeman  |  08 Apr 2020Text size  Decrease  Increase  |  
Email to Friend

The Bank of Queensland's decision to defer dividends on Wednesday likely presages similar moves at Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ Bank (ASX: ANZ)

It's a decision that is anxiously awaited by the thousands of Australian investors who own shares in the large banks, which collectively comprise around 20 per cent of the ASX 200 index.

Australian banks are due to start reporting their half yearly earnings for 2020 at the end of this month. ANZ will report on 30 April and Westpac, NAB and Macquarie will report on 4 May, 7 May and 8 May respectively.

Bank of Queensland (ASX: BOQ) became the first to announce a dividend deferral on Wednesday in a message to investors. That payment was to be 31 cents per share, down from 38 cents per share this time last year.

The decision came as BOQ reported a 10 per cent drop in cash earnings to $151 million for the first half of 2020.

This comes after the Australian Prudential Regulation Authority instructed banks on Monday to seriously consider suspending their dividends until there was more certainty about the impact of the coronavirus pandemic.

This stops short of what's happened in the US, Europe and most recently New Zealand, where regulators have ordered banks to cease distributions entirely.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

In Australia, Zaia thinks dividends could be suspended for as much as two years of earnings.
"Earnings is what's going to dictate what happens to dividends," Morningstar banking analyst Nathan Zaia says.

"So, we recently lowered our dividend expectations across all banks, most of the majors are reduced by up to 25 per cent."

Zaia expects dividends will be cut a little less than this because banks have paid the dividend for one half of the financial year, and they have $6 billion in capital above their minimum requirements.

"But it's really going to come down to how big an impact this economic slowdown has on their loan losses," Zaia says.

"And that is where there's a lot of uncertainty and a lot of variability can come out in their earnings profile."

Zaia foreshadows some unwelcome news for investors and believes banks' dividends are going to fall faster than their earnings.

"It's disappointing for shareholders that rely on these income streams, but there's not much the banks can do about it really."

Like most things surrounding the coronavirus epidemic, there are a lot of unknowns. Uncertainty surrounding the virus itself is unprecedented, according to an IMF study of other global pandemics.

And for Australia's banks, Zaia thinks dividends could be suspended for as much as two years of earnings.

This is based primarily on Morningstar's outlook for loan losses, which are going to be sizeable. Standard & Poor's has warned the number of Australians falling behind on their mortgage repayments is likely to be bigger than during the 2008 GFC.

Zaia's modelling assumes loan losses will increase to about 0.03 per cent of loans by fiscal 2021.

"And to put that into perspective, they are running at about 0.013 basis points [of loan losses] at the moment," he says.

"For Westpac, that means their bad debts will have gone from $800 million to over $2 billion," Zaia says.

He thinks dividends will fall, and then gradually loan losses will normalise.
But he doesn't think this level of bad debts will last for long—as the share price sell-off suggests.

Big 4 shares since the pandemic hit markets

bank shares

"We think the things will recover gradually. And I think dividends start recovering post that," Zaia says.

"But in saying that, you know, could things be a lot worse than we're currently forecasting in our numbers now? Yes, it's very possible. These are very uncertain events and we don't know exactly how we're going to come out of it."

Which banks are vulnerable?

All the major banks all have large exposures to the housing market through their lending operations.

"Westpac has a bit more in the investor property side as well, whether that becomes more problematic or not is still unclear," Zaia says. But he doesn't believe the banks' mortgage books and a flattening in house prices are the main source of earnings pressure.

"The average loan-to-value ratio across the banks in their mortgage books is around 60 per cent. So, it's going to take a massive fall before that equity buffer is gone."

And the brighter news in all this is that Morningstar's fair value estimates haven't been cut substantially. Zaia reduced his fair value estimates for the four banks by between 3 and 7 per cent in the middle of March.

"In the long term, what their earnings might have looked like five years ago before this pandemic is probably still the same," Zaia says.

"Their loan books will still grow, and they'll still be earning interest on that, loans will normalise. So, it's scary in the short term, and we can't predict where share prices will go. As the news comes out and gets worse, share prices might fall more.

"But what we want to stress is the importance of taking a long-term view, this really isn't detracting from their valuations."


is senior editor for Morningstar Australia

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend