The Big Four Banks’ new dividend reality examined

Australia & New Zealand Banking Group (ANZ), Westpac Banking Corporation (WBC) and National Australia Bank (NAB) have now all reported their FY20 half-year results, giving investors a partial view into the impact the coronavirus has had on the banks.

The story here was mostly the same: cash profits were down, provisions were up and dividends were – as they really always have been – the key talking point.

Unlike the other big three banks, the Commonwealth Bank of Australia (CBA) will provide the market with a Q3 trading update next week.

NAB, Westpac, CBA and ANZ share prices: dividends remain all-important

NAB’s half-year results proved to be the most controversial of the big four. Here, the commercially-inclined bank revealed that it would be tapping the markets for $3.5 billion in fresh capital while also issuing a dividend.

‘Capital is being bolstered via a capital raising and a reduced interim dividend,’ the bank somewhat paradoxically said.

Specifically, NAB said it would pay an interim dividend of 30 cents per share, down substantially from the interim dividend the bank paid in FY19.

Reduced dividend or not, some, like Andrew Linden from RMIT's School of Management, described NAB's decision to still pay out a dividend in the current environment as illogical.

Mr Linden, speaking to InvestorDaily, said:

‘Paying dividends right now is illogical given NAB has announced that it intends at the same time to raise more than $3 billion in additional capital. This also in the same week details of the RBA’s $100 billion intervention to protect bank liquidity [were] revealed in a speech by governor Philip Lowe.’

Moreover, in early April, the Australian Prudential Regulation Authority (APRA) warned all Authorised Deposit Taking Institutions (ADIs) ‘to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance,’

APRA went on to note that such limitations may take the form of ‘prudent reductions in dividends, taking into account the uncertain outlook for the operating environment and the need to preserve capacity to prioritise these critical activities.’

In the wake of APRA’s directive, some investment banks argued that it was likely that the big four would cut or eliminate entirely their upcoming round of dividends.

Under a stressed scenario, and save for CBA, Macquarie posited that Westpac, NAB and ANZ would likely choose to suspend their dividends entirely.

‘We estimate that CBA should still be able to sustain a reduced dividend in the stressed scenario,’ the investment bank’s analysts said.

Macquarie analysts proved to be mostly correct; unlike NAB, when Westpac and ANZ’s half-yearly results rolled around both banks chose to defer their interim dividends. The specifics around when the two banks may resume their dividends programs differed, with Westpac offering a relatively indeterminate outlook, saying the Board will:

'Continue to review dividend options over the course of this year.' However, no further specifics, or an exact timeline was provided.

Interestingly, Citibank analysts are currently forecasting that Westpac will resume paying a 65 cent dividend during its full-year results.

By comparison to WBC, ANZ gave a slightly more concrete timeline on further dividend discussions, noting during its H1 that the Board ‘will provide an update as part of a trading update in August in conjunction with the release of its Pillar 3.’

Elsewhere, in late April Citibank analysts said they are currently expecting CBA to cut its 2H20 dividend by 26.4% – to 170 cents per share.

In March CBA paid an interim dividend of 200 cents per share.

Overall, in the last months the big fours' share prices have struggled: CBA has dropped 4.15%, NAB has dipped 0.06%, Westpac has fallen 3.55% and has trended down 2.36%.

How to trade the big four – long or short

What do you make of these recent developments: are you bullish or bearish on the big fours’ prospects? Whatever your view, you can trade the likes of ANZ, CBA, Westpac and NAB – long or short – using IG’s world-class trading platform now.

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

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