Analysts believe the major banks will be forced to reduce dividend payments amid slower growth, margin squeeze and significant remediation costs.
In a research note published on Wednesday (25 September), Morningstar analyst Nathan Zaia forecast Westpac’s 2020 dividend will be reduced by 12 per cent to $1.66 from $1.88.
The analyst believes that the bank may struggle to meet its January 2020 capital deadline.
“When Westpac reported first-half earnings in May, the bank appeared in good shape to meet APRA’s 10.5 per cent unquestionably strong target by January 2020,” Mr Zaia said.
“However, we estimate capital headwinds, new and previously known, will detract around 44 basis points from Westpac’s common equity Tier 1 ratio by December 2019.”
Morningstar believes that if Westpac maintains its final dividend of $0.94 a share, which is paid in December, its CET1 capital level will fall below 10.5 per cent. To offset this, the research house assumes that the major bank will partially underwrite the dividend reinvestment plan (DRP).
NAB used the same strategy in May when it partially underwrote $1 billion on top of the $800 million received through ordinary DRP participation by shareholders.
The capital headwinds are largely being driven by remediation programs among the big four banks. In July, APRA announced a $500 million operational risk overlay for the banks. This applied to all majors except CBA, which was asked to hold an additional $1 billion in capital. These capital burdens will remain in place until the banks have completed their remediation programs and strengthened risk management.
Last month UBS analyst Jonathan Mott warned that the majors will be forced to cut dividends as net interests margins become unsustainable.
Mr Mott explained that with interest rates entering ultra-low territory, the ability of the banks to generate a lending spread and return on equity (ROE) has become significantly challenged.
“If the housing market does not bounce back quickly this could put material pressure on the banks’ earning prospects over the medium term, implying that the dividend yields investors are relying upon come into question once again,” he said.
UBS now believes the majors will be forced to cut dividends in the next two years.
“We believe the significant revenue pressure the banks are facing as interest rates fall and NIMs decline will force the banks to review their dividend policies,” Mr Mott said.
UBS expects CBA, Westpac and Bendigo and Adelaide Bank to cut their dividends over the next two years if the RBA cuts the cash rate to 0.5 per cent or undertakes any alternative monetary policies like QE.