Why the Big Four Banks may be about to slash their dividends

Australia’s long-standing love affair with bank dividends looks set to sour, with Citibank expecting the big four banks will soon start slashing dividends as a result of the coronavirus (Covid-19) pandemic.

As investors seek safety ‘no matter the cost’, equity markets across the globe have been sold-off sharply. To illustrate that point on a local level, in the last month the CBA share price has fallen 35.22%, ANZ has collapsed 44.65%, while both NAB and Westpac have crashed 46.88% and 43.10%, respectively.

As a silver lining of this carnage, Citibank this week upgraded all Australian banks, including the big four and the regionals, to a Buy rating.

Moreover, though the investment bank has also lowered its price targets on all of the big four banks in response to the current Covid-19 situation; as the below table illustrates – at current price levels – Citi’s estimates still imply high levels of upside potential for investors.

How to trade the big four banks

Where do you stand: is this another case of an investment bank being overly bullish or is Citibank on the right track here? Trade accordingly. You can use CFDs to trade both rising and falling markets, through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) ANZ, using CFDs, follow these easy steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘ANZ’ in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade

CBA, ANZ, Westpac and NAB share prices: the outlook

In light of this sector re-rating, Citi has ranked ANZ as its most preferred bank, citing its ‘exposure to high grade corporates with better resilience in the shutdown, as well as better leverage to widening asset spreads in the recovery,’ as two positive factors.

Looking at the broader implications the coronavirus, Citi notes that it expects bank net interest margins to continue to fall before rising as commercial asset spreads widen; earnings are also anticipated to drop off modestly across FY20 and FY21; and impaired assets and bad debts will likely rise across the sector.

‘The shock to business and household cashflow that will be caused by a shutdown of economic activity is likely to be unprecedented. Businesses will need to reduce staff, with this process already beginning. Households will need to have access to finance to draw upon, as well as reduce their savings, as many will be without a wage or salary over the next 6-12 months,’ Citi said.

As a result of all this, the investment bank’s base case is not only a significant cut to earnings in FY20 and FY21, but a likely reduction to the big four's all important dividend payments.

‘We expect dividends to cut by 18% at ANZ to $1.30, cut by 15% at CBA to $3.65, cut by 10% at NAB to $1.50 and finally cut by 18% at WBC to $1.30.'

There are some positives mind you, not only does Citi expect no further dividend cuts after that, but it expects bank profits to stage a sharp bounce-back in FY22, with cash earnings estimated to rise ~17% in that period.