Australia and New Zealand Banking Group (ASX: ANZ) is expected to cut its dividend by 17% to $1.50 per share this financial year, according to broker Morgan Stanley.

At the current price of $22.16, that equates to a yield of 6.8%, fully franked, or around 9.7% grossed up. ANZ paid a dividend of $1.81 last financial year, (86 cents interim and a 95 cent final dividend).

The broker says it expects National Australia Bank Ltd (ASX: NAB) to follow next year, while Commonwealth Bank of Australia (ASX: CBA), and Westpac Banking Corp (ASX: WBC) will keep their dividends on hold.

We believe declining ROEs (returns on equity) mean target payout ratios are hard to sustain and the margin for error looks narrower at ANZ and NAB,” the broker says.

anz-dividends-morgan-stanley-apr-8

Source: Morgan Stanley Research

But despite the forecast dividend cut, investors appear unlikely to care, with a yield of 6.8% among the highest available from large companies listed on the ASX. And Morgan Stanley appears to be an outlier, with consensus forecasts suggesting ANZ will only drop its dividend by 3 cents to $1.78. That equates to a yield of 8%, and 11.5% when including the franking credits.

The bigger concern for many investors is how ANZ will overcome the many headwinds the bank currently faces. That includes higher wholesale funding costs, higher capital requirements, regulatory concerns and rising bad debts. ANZ is one of the banks exposed to the collapse of steel maker Arrium Ltd (ASX: ARI), and recently increased its bad debts forecast by an additional $100 million above its previous forecast of $800 million.

Given ANZ’s share price has dropped from a high of around $37.00 12 months ago to its current price, investors who have held on have seen a 40% paper loss – around $14.80. It could be fairly easy for ANZ’s share price to fall another $1.50 or even $2.00, meaning investors could still go backwards this year, despite the generous dividend.

Foolish takeaway

Some commentators think the banks are at their cheapest levels in many years and they are right. But what they seem to have forgotten is that the banks haven’t faced the myriad issues they now face for many, many years.

Cheap is a relative term, and investors need to remember that the bank’s share prices could always get cheaper. (ANZ’s share price hit $17.63 in 2011 – and that was two years after the GFC).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.