The days of Australian investors being able to rely on banks for a secure dividend income stream are “long gone” according to Morningstar.
Earlier this year, the Australian Prudential Regulation Authority (APRA) asked banks to maintain their dividends at no more than 50% and banks should offset the impact of dividends on their balance sheets by raising more capital through dividend reinvestment plans.
Speaking at the Morningstar Investment conference, Morningstar equities analyst Nathan Zaia said: “People have got used to banks providing a solid income stream. Banks have kept moving the payout ratio up so maybe this will be a circuit breaker. I think they will stay at 50% for the rest of this year and maybe next year.
“Hopefully they can all go back to 70% as the economy recovers and the dividend payout ratio will likely go up and down. So, bank dividends will increase again but gone are the days of relying on banks to pay a steady dollar amount of dividend.”
He said his top pick for the big four banks would be Westpac as he felt the risks of investor loans were exaggerated. Westpac were expected to raise $1.5 billion in capital in order to stay at 10% capital ratio and Zaia said any downside was priced into the stock.
“As Australia’s second-largest deposit holder and lender, the bank should generate strong profits as loan losses fall, cash rates begin to rise and cost savings are achieved,” he said.
“The AUSTRAC penalty has been agreed with a larger compliance team and recent lessons make similar breaches less likely. No interim dividend has lowered confidence in future distributions but reduced the need or size of dilutive raisings. Investor loans are not showing higher risk of default and capacity to switch to interest-only gives borrowers time.”
Shares in Westpac had lost 26% since the start of the year to 7 October, 2020, the largest loss of the big four banks, compared to 12% by Commonwealth Bank, 23% by NAB and 24% by ANZ.
