Analysts think Westpac Banking Corp (ASX: WBC) should slash its dividend payment and raise more capital when it reports it full year results to end of September 2016.
That's according to broker CLSA. Analyst Brian Johnson thinks the bank should raise capital now, while the shares are at current levels of $30.00 and the market views the company as healthy. The analyst also thinks that Westpac should cut its year-end dividend to 80 cents from the 94 cents it paid out for the six months to end of March 2016, and the 94 cents final dividend it paid last year.
As Mr Johnson told clients, "It makes little sense to maintain a higher dividend if that increases the capital shortfall". However, Westpac could also fully underwrite its dividend reinvestment plan (DRP), which would mean that the bank retains all the capital to be paid out as dividends and instead issues new shares.
The banks already have some form in cutting dividends or at least not increasing them. Australia and New Zealand Banking Group (ASX: ANZ) cut its first half dividend to 80 cents from 86 cents last year, while Commonwealth Bank of Australia (ASX: CBA) maintained a flat dividend for the first time since February 2009 – during the GFC.
Highlighting the need for the banks to raise capital, Morningstar expects Westpac to raise $5.5 billion within the next four years, CBA would need $6 billion, while ANZ and National Australia Bank (ASX: NAB) would require $4.5 billion each.
Morningstar analysts also expect that the big four banks will need to reduce their dividend payout ratios before 2020.
However, as the banks have repeatedly shown, they aren't forced to cut dividends to raise capital. They can use an underwritten DRP as mentioned above, sell off assets, cut back on discounts to customers or raise interest rates to increase their asset base.
Foolish takeaway
I wouldn't bank (excuse the pun) on Westpac cutting its dividend. Bank executives are generally loath to do that and will usually try and find another way to raise capital.
