The Big Four Banks’ Covid-19 provisions and dividend outlook

Adequacy of bank provisions

The March 2020 earnings period for Australia’s big four banks proved to be illuminating, though mostly predictable. Here Australia’s financial titans revealed a lofty set of provisions, reported lower cash earnings, and severely cut or entirely eliminated their dividends.

NAB may have surprised the market the most, announcing a $3.5 billion capital raise while aggressively slashing – though not completely culling – its interim dividend.

Elsewhere, both ANZ and Westpac announced they would be deferring their interim dividends as a result of elevated levels of economic uncertainty; while CBA, reporting its third quarter results this week, provided no commentary around its final dividend intentions.

Yet even as the banks make billions of dollars’ worth of Covid-19 related provisions and take measures to shore up their balance sheets, analysts from Citibank – who already lean bullishly on the banks – have argued that these provisions are meagre when compared to other historic economic downturns.

Specifically, looking at the implications of the banks’ March period provisions, Citibank analysts noted that as a percentage of gross loans and advances (GLAs) and when compared to the losses incurred over a three year period during the GFC and the recession of the 1990’s – the estimated loan losses of the banks are ‘very mild.’

As a consequence, the investment bank went on to argue that:

‘We expect that COVID-related loan losses over the next 3 years will be higher than the collective provision adjustments made in these results. Balance sheets will grow giving rise to more loan loss provisions, but expected loss rates on the existing book is expected to higher than what was presented by Banks in these results.’

ANZ, CBA, Westpac & NAB share prices: dividend implications

Interestingly, while the expectation is that these losses may increase, Citibank continues to see value in Australia’s banks, describing the sector as ‘cheap’ – while also maintaining that in the ‘base case scenario’ dividends will inevitably resume – though at more sustainable payout ratios.

Looking at the near term specifics – bar a sharp spike in loan losses during FY21 and assuming APRA is satisfied with the banks’ capital positions – Citibank further posits that ‘dividends are likely to resume at FY20 results,’ though ‘This may be too early for CBA in August.’

The investment bank currently has Buy ratings on all of the big four banks, as well as Buy ratings on Australia's two regionals, Bendigo and Adelaide Bank and Bank of Queensland.

How to trade bank stocks

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