CBA, ANZ, Westpac and NAB shares: the current dividend outlook

New RBNZ capital rules

The Reserve Bank of New Zealand (RBNZ) last week handed down its final set of capital requirements for large and small New Zealand banks.

To the relief of local and international investors, these capital requirements came in softer than expected and are set to be stretched out over a more generous time-frame (seven years instead of five).

The big four Australian banks – two of which have significant operations in New Zealand – rallied in response to this decision. One wonders how long such optimism can last though, as the Australian banking sector continues to face a variety of headwinds.

Indeed, though a more moderate ruling than anticipated, the key takeaway was mostly the same: the big four would be required to bump up their capital positions – estimated in the realm of $20bn – in the longer-run.

Among the big four, Australia and New Zealand Banking Group (ASX: ANZ) remains the most exposed to the headwinds of these new capital rules given its outsized position in New Zealand. Quantifying this exposure, 30% of ANZ’s cash earnings are derived from its New Zealand operations, for example.

The Commonwealth Bank of Australia (ASX: CBA) appears the least exposed to these capital changes – with only 12% of its cash earnings sourced from NZ.

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CBA, ANZ, Westpac and NAB dividends in focus

All up, and according Macquarie Wealth Management, the big four will have to deploy some $1.5bn to $2.5bn in capital between FY20 to FY22 as a result of the RBNZ's decision.

Though some (emphasis on some) of this may be achieved organically, Macquarie argues that these short to medium-term requirements will likely put pressure on bank dividends, potentially reduce the big four’s ability to pursue capital management initiatives (dividend increases, special dividends, or buy-backs, for example), as well as increase the possibility of further cap raises.

Looking at a variety of analyst opinions below, we examine why such concerns may not apply to each of the big four equally.

Mind you, all of this is framed by a larger issue: Australian banks are indeed already struggling – low rates are eating into margins and loan growth has slowed for a number of the big four.

NAB share price: Morgan Stanley bearish

Maybe one of the worst hit by these capital changes will be National Bank of Australia, according to Morgan Stanley, at least.

In a research report released yesterday, Morgan Stanley posited that NAB may very well be required to a pursue a $3.5bn capital raise to fund new-CEO Ross McEwan’s transformation program as well as cut their dividend by a further 10% in FY20e.

NAB already cut their dividend as part of their FY19 results.

In step with this bearish analysis, Morgan Stanley remains underweight NAB – lowering their share price target to $24.00 per share – with the expectation of weaker earnings across FY20 and FY21.

ANZ share price: flat dividend expectations

New Zealand was always going to be the problem here. Though ANZ has touted the strength of its capital position and dismissed the need to raise further capital, recently saying:

'Given the extended transition period and our strong capital position, we are confident we can meet the higher requirements without the need to raise additional capital.'

Macquarie is decisively sceptical. Specifically, due to ANZ’s overweight position in NZ – to which the bank derives 30% of its cash profits, the investment bank believes that ANZ’s current capital position may be weaker than it appears. As a consequence of this, Macquarie analysts are of the opinion that ANZ will likely be required to raise more capital, at some point.

Canvasing a broader view, even though Morgan Stanley believes ANZ’s ‘distributable payout ratio’ is likely to come under pressure as a result of the RBNZ’s new capital rules, the investment bank estimates that ANZ’s dividend yield will remain stable at 5.8% from FY20e to FY22e.

CBA share price: a special dividend looming?

By certain metrics, CBA is one of the most expensive banks in the world, according to some analysts. Yet this premium, according to Macquarie at least, remains justified, given CBA’s comparatively superior capital position.

In fact, given its strong capital position, Macquarie analysts now expects CBA to use any excess capital above the bank’s Level 2 capital requirements to issue a special dividend or pursue a buy-back program.

Though distinct positives – if they come to pass – Macquarie still has an underperform rating on CBA and a 12-month share price target of just $75.00.

Westpac share price: dividend yield may decline

Building on all of this, Macquarie expects that Westpac’s dividend yield will decline in the years ahead, to 6.6% in FY20, 6.2% in FY21 and 6.2% in FY22.

Though, with a potential fine that could run as high as $3.7bn (according to Bell Potter) – stemming from the bank’s alleged 23 million violations of the AML/CTF Act – Westpac investors may potentially be concerned about more than a declining dividend yield.

Even so, at its current share price, Macquarie still sees some upside for the beaten-down bank: hitting Westpac with a 12-month share price target of $26.00 and a NEUTRAL rating.