In a research note released on Wednesday (3 October), Morningstar analyst Nathan Zaia downplayed the impact of NAB’s $1.18 billion in additional charges for customer remediation.
The big four bank announced this week that approximately 92 per cent of the 2H19 charges relate to wealth and insurance-related issues.
Mr Zaia said that while the additional charges are “hefty”, they won’t have an impact on the analyst’s valuation of NAB stock or on the bank’s dividend payout.
“At less than 2 per cent of the bank’s market capitalisation, and not expected to recur, the effect on our valuation is immaterial,” he said.
“Higher remediation costs are unlikely to affect the bank’s final dividend and our fiscal 2019 dividend forecast remains $1.66 per share.”
Mr Zaia also has Westpac’s 2020 dividend pegged at $1.66 a share, a 12 per cent drop from the $1.88 (94 cent interim) paid in 2018. He believes Westpac will be under pressure to meet its “unquestionably strong” 10.5 per cent capital deadline by December.
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.
Morgan Stanley analysts have a more bearish outlook and have tipped Westpac to slash its dividend by 15 per cent and raise $2 billion in capital through its DRP.
“In our view, major banks will need to fundamentally change their approach to capital management given pressure on profitability due to lower rates and more onerous capital requirements from APRA and the RBNZ,” Morgan Stanley’s equity analysts told clients on Thursday (3 October).
“This means they should target higher capital levels and lower their dividend payout ratios. We forecast dividend cuts at WBC and ANZ, but also think that payout ratios at NAB and CBA remain too high.”
The investment bank forecasts ANZ will cut its dividend by 10 per cent and CBA’s payout of $2.31 a share is likely to come under pressure.
Like Morningstar, Morgan Stanley sees no change to NAB’s dividend after it lowered its interim payout by 16.2 per cent in May to 83 cents a share.
“ANZ and NAB lowered their dividends in 2016 and 2019, respectively, but we believe the major banks’ payout ratios remain too high given pressure on profitability due to lower rates and more onerous capital requirements from APRA and the RBNZ,” the investment bank said.
“As such, we think it’s time for all the major banks to review their medium-term capital management plans.”
Morgan Stanley has a negative stance on the major banks given a challenging operating outlook, an uncertain regulatory environment, the growing threat of disruption, and stretched trading multiples.
“While tail risk in relation to the economy, the mortgage market, and the regulatory environment has decreased, we believe the combination of modest loan growth, the impact of lower rates, a multi-year reinvestment burden and changes to capital management prospects is likely to see the banks remain in an EPS and ROE downgrade cycle,” the analysts said.
