The big four bank should not be paying dividends given the uncertain depth of the coronavirus crisis ahead, a business researcher has said, as investment analysts have indicated the payout was larger than expected.
On Monday, NAB released its half-year results almost two weeks earlier than expected. The bank’s earnings had plunged by 51 per cent year-on-year to $1.4 billion, with its profit primarily eaten away by loan impairment charges of $1.2 billion.
The bank launched a $3.5 billion raising, which was completed on Tuesday, signalling it was building up its capital for “uncertain times ahead”.
NAB had also cut its executives’ fixed remuneration by 20 per cent and slashed its dividend by close to two-thirds year-on-year to 30 cents. The bank’s chief Ross McEwan acknowledged shareholders would be feeling the drop.
But Andrew Linden, sessional lecturer on corporate governance and business at RMIT’s school of management, believes NAB shouldn’t be dipping into its capital to make any payouts at all.
“NAB shouldn’t be paying any dividends if it is ‘uncertain’ about the depth and length of economic impacts of COVID-19,” Mr Linden 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.”
Despite being down 64 per cent, the bank’s interim dividend was higher than expected, Morningstar analysts commented.
“Starved of revenue growth the bank will focus on cost-cutting initiatives, but these are proving harder than expected to achieve as high regulatory and compliance costs bite,” Morningstar’s analysis stated.
“In addition to rising loan losses due to the coronavirus, potentially large penalties due to claims by ASIC and AUSTRAC are an additional threat to near-term earnings.”
Mr Linden likewise noted there were concerns around the level of corporate debt and reluctance of key agencies to acknowledge “the link between prudent risk and maintaining stability, and operational risk and systemic misconduct.”
“There are also concerns that risks from the banking royal commission era misconduct and irresponsible lending are like a ticking time bomb still sitting in bank loan books,” he said.
But Morningstar is optimistic regardless that NAB will bounce back in the long-term, commenting the market is too focused on short-term earnings.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].