Those thinking that the worse is behind the embattled ASX banking sector might need to think again as Morgan Stanley highlights a bank that could shock investors with a dividend cut next month.
This bank is Bank of Queensland Limited (ASX: BOQ) and the news may be weighing on sentiment today as the BOQ share price slumped 1% to $9.14 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is trading 0.5% higher.
The Bank of Queensland share price is the worse performer among its peers. The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price is up 0.6% at $9.74 while three of the big four banks are also trading in the green.
The only exception is the Commonwealth Bank of Australia (ASX: CBA) share price, but even that is only a marginal 0.2% in the red.
A circa 20% dividend cut
"We think it's plausible that BOQ could cut its dividend – potentially by ~20% – at its April 11 result, given change in management and compounding concerns from falling margins, sub system loan growth, no room to cut costs, no margin for error on loan losses and no excess capital," said Morgan Stanley.
"The current ~90-95% payout ratio is unsustainable given the tough operating conditions, in our view."
It's a counter-consensus call, meaning the majority of brokers don't believe BOQ's dividend is at risk.
What this also means is that the stock could face an ugly sell-off if Morgan Stanley is right as the market isn't pricing in a dividend cut.
No room for error
"With the sale of St Andrews Life no longer proceeding there is no excess capital vs management's target CET1 range of 8.25% to 9.50%. A 20% dividend cut wouldreset the payout ratio to ~73%, leading to a ~6.5% dividend yield (the post-2009 average) vs 8.2% on our base case forecasts," added Morgan Stanley.
"However, even post a dividend cut BOQ's capital options would remain limited with full DRP neutralisation or dividend growth not possible before FY22E without reducing the CET1 ratio."
BOQ's net interest margin (NIM) is also likely to remain under pressure even though the bank had lifted rates on some of its mortgage products. Morgan Stanley is forecasting a 5-basis point dip in its NIM to 1.93% for 1HFY19.
What's also unsettling is that the market share loss of the big banks isn't benefiting BOQ as its mortgage book is growing slower than the overall market.
Morgan Stanley has a "underperform" recommendation on the stock with a price target of $8.50 a share.
