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Here’s why experts agree on why bank dividends could be cut

A short time ago I wrote of the firm views held by the very successful Australian fund manager Wayne Peters, who manages the unlisted Peters MacGregor Global Fund (PMGF). His investing style is very much informed by Warren Buffet, having attended the Berkshire Hathaway (NYSE: BRK,A, BRK,B) annual meeting in Omaha 17 times.

Wayne Peter’s views on Australian banks have since been vindicated by an Australian government inquiry and the managing director of Australia’s biggest listed investment company (LIC). These views weigh the balance between the safety of the Australian banking system in times of duress and the amount of capital banks should be required to hold.

Why is this capital buffer detrimental to bank dividends?

If forced to hold more capital, the overall returns will be reduced, especially for the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ). This in turn would restrict the ability of banks to keep paying dividends at current levels, provided they don’t derive extra profits from other sources.

2 experts & 1 enquiry in agreement on an increased capital buffer:

1. Wayne Peters stated that Australian banks are heavily reliant on the goodwill of the offshore bond markets to fund housing loans. U.S. banks like Wells Fargo & Co (NYSE: WFC) fund home lending by using 90% of funds held on deposit. In Australia that figure is only 65%, which leaves Australian banks at the mercy of world bond markets to fund the balance.

2. At the recent Financial System Inquiry (FSI), David Murray advocated that the big four would need to hold an additional $23 billion in capital.

3. Finally, in revealing full-year results for Australian Foundation Investment Co.Ltd. (ASX: AFI), managing director Ross Barker stated that he would agree with any tightening of the banking system that would ”perhaps reduce a bit of their…returns”

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