My love-hate relationship with ASX banks stocks is only deepening as the latest update from our banking regulator has heightened the risk of a dividend cut in the sector.
Let’s face it, the only real reason to be investing in bank stocks at the moment is for dividends and if these returns are under threat, there’s little reason to be in the sector.
This is why the regulatory guidance (APS 111) by the Australian Prudential Regulation Authority (APRA) on the funding of overseas subsidiaries was keenly watched by experts and Macquarie Group Ltd (ASX: MQG) is warning that the sector is facing a circa $13 billion capital shortfall!
The best dividend paying bank stock
The only exception in the sector is Commonwealth Bank of Australia (ASX: CBA), according to the broker. Our largest mortgage lender is in the best capital position – and that means that its dividend is not only safer from a cut than its peers, but it may also be able to fund extra capital returns.
I am relatively overweight on CBA even though I know the stock is expensive. But putting more capital into CBA was never about valuation per se but my confidence that the bank would probably be the last to cut its payout.
“APRA’s proposal creates capital-related diseconomies of scale for overweight institutions operating in offshore markets. We expect that the more concentrated banks will look to divest or scale down their NZ operations to minimise the potential capital impost stemming from pending regulatory changes,” said Macquarie.
“Given APRA’s favourable capital treatment for the first 10% of capital invested in NZ, this suggests that prospects of full NZ divestments are less likely, and banks would either look to divest portfolios, partially divest businesses or look for joint ventures.”
Capital hole that needs to be filled
The broker said that the consequences of APRA’s guidance is worst than it expected for Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). The capital shortfall for Westpac is estimated at around $5 billion while ANZ Bank needs around $4 billion.
National Australia Bank Ltd. (ASX: NAB) doesn’t escape unscathed. It requires about $4.5 billion in extra capital.
Our big banks are also under pressure from the Reserve Bank of New Zealand, which is considering lifting the capital they require to operate in that country.
But this doesn’t mean a dividend cut is guaranteed as the banks can sell assets (as they have been) to make up some of the shortfall. They are also likely to lean more heavily on underwritten dividend reinvestment plans (DRPs) to shore up their cash buffer.
“The consequences [of APS 111] for ANZ and WBC are worse than we expected, and CBA’s capital impost now appears smaller than we estimated,” added Macquarie.
“As a result, we expect CBA to be in the position to return capital to shareholders, while others need to look to increase capital from current levels or look to optimise/divest portfolios.”
I am not particularly enamoured by ASX bank stocks but CBA looks to me to be the only dividend hero in the sector – at least on a relative basis.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, and Westpac Banking. Connect with him on Twitter @brenlau.
The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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.