Australia and New Zealand Banking Group flags dividend cut

Australia and New Zealand Banking Group (ASX:ANZ) has flagged a dividend cut.

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Shares in Australia and New Zealand Banking Group (ASX: ANZ) look set to come under further selling pressure after The Australian newspaper reported that the group's new chief executive Shayne Elliot has flagged the potential for dividend cuts.

Given the increased capital adequacy requirements imposed on all the big banks including Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) it seems the banks now have little choice but to cut dividends, or conduct more dilutive capital raisings to bolster capital reserve ratios.

ANZ Bank's new boss reportedly told The Australian that dividends were "just one of the things that might give" as the new boss looks to make his mark in the role and reset strategy.

Management has also been shaken up at ANZ Bank recently with a new head of institutional banking appointed and a new role as head of digital banking to be created.

Over the past year ANZ Bank shares have slumped 26% on the back of capital raisings and the prospect of dividend cuts as the bank's "Super Regional" strategy of growth into Asia also comes unstuck.

Asia has the attractive demographic of a fast-growing middle class, however, even vanilla banking activities like credit card, home loan, or small business lending are fraught with far higher risk compared to Australia.

ANZ Bank has also reportedly run into trouble with some of its commercial lending in Asia and the new CEO is likely to assess whether the risk / reward ratio is adequate to compensate for the higher risks around lending activities in the region compared to its home turf of Australia and New Zealand.

In Australia all the banks also face the headwind of weakening residential property markets in 2016 with a large part of their earnings leveraged to growth in home loan lending.

The basic business of banks being to make more on what they lend than they pay on what they borrow, with net interest margins recently getting squeezed by costlier wholesale funding rates and the competitive local home loan market.

ANZ Bank currently yields 7.6% plus franking credits when selling for $23.68, which means the market is betting heavily on a dividend cut likely to take the total dividend to closer to $1.50 per share than last year's $1.86.

Despite the potential dividend cuts, ANZ Bank is likely to offer a forward yield above 5% plus franking credits in the year ahead and for income seekers a small holding in one of the big banks remains an attractive proposition given that share prices are now adjusting to the banks' forward earnings potential. Investors not focused solely on income however, should probably look elsewhere for businesses with more solid growth potential.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned. You can find Tom on Twitter @tommyr345 Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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