Last Tuesday, banking regulator APRA advised the banks and insurers that it was removing its guidance that dividends should be no higher than 50% of statutory profits. However, it didn’t give our financial institutions open cover to resume paying dividends at pre-Covid 19 levels, saying:
“APRA expects banks and insurers to continue to moderate dividend payout ratios, and consider the use of dividend reinvestment plans (DRPs) and/or other capital management initiatives to offset the impact on capital from distributions. While APRA will no longer hold banks to a minimum level of earnings retention, the onus will be on Boards to carefully consider the sustainable rate for dividends, taking into account the outlook for profitability, capital and the economic environment”.
The economic environment has certainly improved, with employment rising strongly, business confidence improving, consumer confidence soaring, and boarders re-opening (before the hiccup in NSW). The banks appear in hindsight to have over-provisioned for the impacts of Covid-19, with key assumptions of a fall in house prices of 10% and soaring unemployment being way too pessimistic.
While writebacks (or if not writebacks, no further increase in bad debt provisions) will potentially boost earnings in 2021, bank boards are likely to be conservative in how they approach dividend setting. Firstly, the full unwind of the Covid-19 stimulus measures such as Jobkeeper is still some months away and banks will be worried that this is camouflaging the extent of losses by business and households. Secondly, in an environment of low single digit credit grow and ultra-low interest rates, banks remain challenged to grow revenue and earnings. Finally, they will be conscious of “precedent setting”. Boards don’t like to cut dividends, and if they raise them too quickly, they might create a situation where they have to cut again.
What dividends can bank shareholders expect in 2021 and are other capital actions likely? Here is a run-down for each of the major banks.
1. Commonwealth Bank (CBA)
The CBA will be the first of the major banks to show its colours when it reports its first half profits on Wednesday 10 February. In 2020, it paid an interim dividend of 200c (this was declared before APRA imposed the 50% limit), and a final dividend of 98c for a total of 298c per share. Pre-Covid, it paid 431c – an interim dividend of 200c and a final dividend of 231c.
The bank is sitting on a truckload of capital, with a CET1 (level 2) ratio of 11.80% at 30 September, with another 50-60bp to come from announced disinvestments. Of this, 29bp will be realised on 31 December when the sale of BoCommLife completes. There is also a release of capital worth 17bp following APRA’s decision to reduce by $500m the overlay CBA holds for operational risk. CBA also has considerable surplus franking credits.
On consensus, the major brokers have CBA paying a dividend 272.9c in FY21. The range is wide, from a low of 228c to a high of 315c per share. Interestingly, the more recent estimates are higher.
My sense is that the board of CBA would be keen for 2021 dividends to at least match (in aggregate) the amount paid in 2020, which implies a dividend of at least 298c. I favour Morgan’s scenario of a dividend payout ratio in the order of 70% to 75% of underlying earnings, implying a dividend of 309c for FY21 rising to 369c in FY22. This puts CBA on a prospective yield of 3.7% and then 4.4% for FY22.
An off-market share buyback is certainly on the cards, but more likely in the second half when the Covid-19 picture is clearer.
2. ANZ Bank
Until Covid, ANZ had paid 160c in dividends – two halves of 80c each. It had foreshadowed that because of the contribution of earnings coming from New Zealand, in 2021, franking would reduce to 70%.
When APRA issued its guidance earlier this year, ANZ took a very conservative approach and suspended its interim dividend. It subsequently paid out 25c in late September, and then a final dividend of 35c, making a total of 60c for the full year. Because the payout ratio was less than 50%, it was able to fully frank both dividends.
New ANZ Chair Paul O’Sullivan didn’t give too much away at ANZ’s AGM last Wednesday, reaffirming that the “Board is acutely aware of the reliance many shareholders place on their regular dividend, and on the value of franked dividends” He went onto say, however, that “ultimately, our final decision will be influenced by how the remainder of the crisis evolves, particularly from a macro-economic perspective, and our views on the longer term sustainability of our dividend”. ANZ was keen to stress that it hadn’t diluted shareholders with a capital raising (unlike the NAB or Westpac).
The brokers forecast ANZ to pay dividends of 95.3c per share for FY21 (low of 78c to a high of 127c), and in FY22, 123.2c per share. My sense is 110c for FY21 and 125c for FY22, with the potential for both to be fully franked. This puts ANZ on a prospective yield of 4.7% and 5.4% for FY22.
ANZ is well capitalised with CET1 ratio of 11.3%. However, capital actions are unlikely in the short term and because it does not have access to surplus franking credits, off market share buybacks aren’t on the agenda.
3. National Australia Bank
NAB raised $4.25bn of capital at $14.15 per share at the heights of the Covid-19 crisis. This helped increase NAB’s CET1 ratio to 11.47% (as of 30 September), which will rise to 11.82% post the completion of the sale of MLC.
But it also increased the number of ordinary shares on issue by approximately 10%.
In FY19, NAB paid dividends totalling 186c – two dividends of 83c each. In FY20, NAB paid two dividends of 30c each, the final on the enlarged share base.
Commenting at the AGM last Friday, CEO Ross McEwan said: “we are a dividend-paying stock and we will resume paying at higher levels when it’s right to do so”. He was quite optimistic about the strength of the recovery, and said that the current economic picture reflects what “we considered to be best case In our scenario planning from earlier in the year.” He emphasised that “achieving double-digit cash returns on equity will be a key measure of our success” and that “cost and capital discipline are essential to delivering better returns”.
On consensus, the brokers have NAB paying a dividend of 91.6c in FY21 (range low of 74c to high of 117c per share), and in FY22, 112.4c per share. I favour 100c in FY21 and 115c in FY22. This puts NAB on a prospective yield of 4.3% and 4.9% for FY22.
Although the capital ratio is healthy, it is difficult to envisage a capital return so shortly after a substantial capital raising.
4. Westpac (WBC)
The laggard and clear under-performer of the 4 major banks, Westpac abandoned its interim dividend in FY20 and just paid a final dividend of 31c. This represented a cut of 82% for shareholders from the 174c paid in FY19.
New Chairman John McFarlane or CEO Peter King didn’t have much to say at the company’s AGM the other week. McFarlane apologised, saying: “Now, I am conscious how important dividends are to individual shareholders and know how unhappy you have been about the decision not to pay a first-half dividend as well as the lower dividend for the year. Going forward, I’m hopeful we will return to a more consistent dividend each half”.
The brokers have Westpac paying a dividend of 90.7c in FY21 (range from a low of 70c to a high of 124c), and 112.0c per share in FY22. I favour 100c and 110c, which puts Westpac on a yield of 5.0% and 5.5% for FY22.
Capital returns aren’t on the agenda at Westpac
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