This ASX big bank stock is most at risk of a dividend cut

The big banks have got to be unluckiest bunch of ASX shares on our market! I can’t think of another sector that’s facing as many headwinds as our largest financial institutions.

Just as you thought the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price have turned a corner, a new chill blows from across the Tasman.

NAB is the latest to issue a response to discussion paper from the Reserve Bank of New Zealand (RBNZ) looking at making banks operating in that country to increase their capital adequacy ratio to better protect the New Zealand banking sector from a shock.

New capital headwind

RBNZ is looking at lifting the ratio so that banks like NAB’s subsidiary, Bank of New Zealand (BNZ), will be made to boost its tier-1 ratio to 16% from 10.2%.

NAB warned that under the proposed changes, BNZ’s tier-1 capital may need to increase by a hefty NZ$4 billion to NZ$5 billion ($3.8-$4.7 billion).

To put the figures in context, that’s around what NAB paid in dividends in FY18 (the bank paid $4.2 billion in total dividends last financial year).

The good news is that the impact on NAB’s group capital position is expected to be significantly lower as the additional capital required for BNZ doesn’t affect the bank’s capital position other than through an increase in risk-weighted assets relating to BNZ’s exposures.

But don’t be fooled into thinking that this won’t have an impact on share valuations. A substantial increase in capital requirements in New Zealand will impact on NAB’s CET-1 ratio here in Australia.

Dividend risk growing

The bank will need to put more cash aside for the buffer and that poses a risk to its dividend!

But NAB isn’t alone. All the big four banks have operations in New Zealand although analysts believe NAB and ANZ Bank will be the most affected.

It’s too early to quantify the impact of the rule change as this is only a discussion paper and RBNZ is likely to phase in any capital increases over several years to limit the impact.

Brokers are cautiously optimistic that the big banks won’t have to raise fresh capital to meet the new requirements. It would be a disaster if they needed to sell new shares at these depressed prices.

However, the potential capital increases mean ANZ’s and CBA’s capacity to undertake a capital return is diminished.

The big bank that could be worst for wear from all this is NAB, according to Morgan Stanley.

“We’ve argued that the banks are on track to have “unquestionably strong” capital, but that capital management options are limited,” said the broker.

“At NAB, the path to unquestionably strong looks more onerous, while the prospect of reduced dividends from NZ and the rising capital intensity of volume growth in both Australia and NZ makes its elevated payout ratio harder to justify and a dividend cut more likely.”

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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