It's almost unthinkable that any big bank would trim their dividend and incur the wrath of investors, but Morgan Stanley thinks National Australia Bank Ltd. (ASX: NAB) may be left with little choice but to lower its payout for the first time since the GFC.
The bearish assessment couldn't come at a more delicate time for the sector as it tries to crawl back into investors' good books after a big sell-off in FY18 that left the share prices of the big four lagging miles behind the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
These stocks have been inching back up recently even as Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank reported a drop in earnings as bargain hunters are forming the view that all the bad news is more that reflected in the down-beaten prices of our largest financial institutions.
However, a dividend cut isn't something the market is expecting. If Morgan Stanley's warning comes to pass, National Australia Bank will suffer another painful sell-off that could drag the rest of the sector down with it.
The last time the bank cut its dividend was in 2009 and the broker thinks it should lower its dividend by 12% to $1.74 per share in 2019 to protect its capital position.
The bank indicated it will pay a dividend of $1.98 for FY18 – the same amount it has paid over the last few years even after the spin-off of CYBG PLC/IDR UNRESTR (ASX: CYB), better known as Clydesdale Bank.
"Following the de-merger and IPO of CYBG in FY16, NAB maintained the dividend at 198c and the payout ratio rose to ~81%, but management stated that it would fall towards a 70-75% range as earnings recovered," said Morgan Stanley.
"However, the ratio remains at ~83% in FY18E (excluding one-offs) and looks increasingly unlikely to fall below ~80% in the next 2-3 years."
A cut in the dividend to $1.74 a share will bring the payout ratio to around 75% on the broker's numbers.
Morgan Stanley feels there is a need for the bank to shore up its capital buffer after it posted a Common Equity Tier-1 (CET-1) ratio of 9.7% for 3QFY18 – below the circa 10% the broker was expecting.
The other big banks, including Commbank, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), seem better placed from a capital adequacy perspective and that means they may yet avoid a dividend cut.
That would be especially bad news for National Australia Bank if it is the outlier given that it has been closing the discount gap with its peers over the last few years.
But a dividend cut isn't a given. National Australia Bank could look to sell more assets or encourage more shareholders to participate in the dividend reinvestment plan to shore up its capital position.
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