The ASX big bank shares are outperforming the market with the notable exception of the Westpac Banking Corp (ASX: WBC) share price.
This may be something to do with a prediction by Citigroup that Westpac is likely to cut its dividend by 10% in November when it releases its full year profit results.
The Westpac share price still managed to inch up 0.1% to $29.69 in morning trade but it's lagging behind the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index's 0.2% gain.
In contrast, the Commonwealth Bank of Australia (ASX: CBA) share price jumped 1% to $82.12, the National Australia Bank Ltd. (ASX: NAB) share price rallied 0.8% to $29.20 and the Australia and New Zealand Banking Group (ASX: ANZ) share price gained 0.7% to $27.78 at the time of writing.
"Under much investor scrutiny, WBC has always strongly defended its dividend," said Citi.
"Until recently, we had sided with management. However, we now observe a combination of key factors that lead us to believe a 10% cut to their dividend is more likely."
Why Westpac's dividend is at risk
There are two big factors driving the broker's forecast. The first is the extra capital Westpac may require for its New Zealand operations as banking regulators in that market are considering lifting the capital buffer required by lenders in that country to better protect the New Zealand banking system from a sharp economic downturn.
What this means for Westpac is that it doesn't have much room to funnel profits back from its NZ division, which will hamper organic capital generation in Australia and impinge on its ability to fund future asset growth or possibly even rising bad debts.
This issue has been known for a while, but yesterday's announcement that Westpac's chief financial officer Peter King will be retiring in 2020 could motivate the bank to lower its dividend sooner rather than later.
Citi speculates that his replacement is unlikely to want to defend the high dividend payout given the headwinds that the bank is facing.
Westpac also needs to beef up its CET1 capital adequacy ratio in Australia by January 2020 and the board may also support a more conservative distribution as it becomes more sensitive to shareholder concerns following its first shareholder remuneration strike last year.
Is Westpac still worth buying?
But there's some good news. The broker thinks the market has already factored the dividend cut into the share price given that its trailing yield of over 6% is higher than its peers.
The broker is forecasting FY19 dividends to drop to $1.79 per share and FY20's payment to fall to $1.70 per share. Westpac paid a dividend of $1.88 a share in FY18.
However, Citi thinks the Westpac's valuation looks attractive despite the potential dividend cut and it's reiterating its "buy" call and $31.25 price target on Westpac.
