In a note from broker Morgan Stanley, analysts have warned that the big banks will cut dividends and payout ratios to shareholders. With many self-managed super fund (SMSF) portfolios weighted heavily to the financial sector, this could be a warning sign for income hungry investors.
What are analysts predicting?
In a note to clients, analysts from Morgan Stanley have predicted that Westpac Banking Corp (ASX: WBA) will cut its dividend by 15% when the company reports full-year results next month. In addition, Westpac is also expected to raise $2 billion in order to meet capital requirements. Australia and New Zealand Banking Group (ASX: ANZ) is also predicted to cease its buyback program and drop dividends by 10% when the company posts first-half results next May.
National Australia Bank Limited (ASX: NAB) is predicted to deliver a flat dividend for the year, after the bank cut its dividend earlier this year by 16% from 99 cents per share to 83 cents per share. Commonwealth Bank of Australia (ASX: CBA) is set to keep its dividend unchanged and will launch buybacks worth $2 billion over the next 2 years.
Why are banks cutting their dividends?
Record low interest rates, changing capital requirements and lower margins are forcing the big banks to slash dividends. The challenging operating outlook has prompted analysts to take a negative stance on the big banks, citing the uncertain regulatory environment and strained trading multiples.
The big banks have also come under fire for not passing on the cut in the official cash rate to consumers. The banks explained that full-rate cuts have not been passed on because net interest margins are already squeezed. Analysts estimate that a quarter-point interest rate cut would squeeze bank margins by a further 6 basis points. Overall, the margins for the major banks are expected to fall by an average of 7 basis points for the financial year.
In addition, higher capital requirements proposed by the Reserve Bank of New Zealand have added extra pressure to the major banks with overseas exposure. As a result, analysts believe that the banks will need to change their capital management and devote more focus to higher capital levels rather than dividend payout ratios.
The warning signs of potential dividend cuts were blaring early this year when NAB cut their payout and margin weakness was also reflected in a profit warning from CYBG Group Plc (ASX: CYB).
For many companies, dividend cuts are usually short term until the operating environment stabilises and growth returns. Although income investors may be concerned with the outlook for the dividend payouts from the big banks, the market will present other opportunities to reinvest their wealth.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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.