The outlook for the ASX 200 banks remains challenging in 2020, with potential pressure on dividends. According to reporting by the Australian Financial Review (AFR), analysts at Morgan Stanley are negative on the major Australian banks through 2020 due to multiple pressures on the operating outlook.
Ratings
According to the AFR article, National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Bendigo and Adelaide Bank Ltd (ASX: BEN), and Bank of Queensland Limited (ASX: BOQ) are all labelled as underweight by Morgan Stanley.
Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are ranked as equal weight. The one outlier is Macquarie Group Ltd (ASX: MQG), which is rated overweight, tipped to meet or beat its guidance for FY20.
Operating outlook
Morgan Stanley predicts lower rates will continue to compress lending margins for the banks throughout 2020, lowering profitability. Lending standards, which have tightened over the past few years, will constrain the ability to grow loan books. Significant ongoing investment in risk and compliance functions will be required for several years at least as the banks adjust to operating in a post Royal Commission environment.
Regulatory changes to capital management requirements may also put pressure on profitability, as APRA looks to limit the amount of capital banks can recycle in New Zealand to meet the new capital standards imposed by the RBNZ. Increasing competition from fintechs and neo-lenders also threatens to reduce the banks' market share in areas such a consumer lending.
Dividends in doubt?
According to Morgan Stanley, the banks should look at reducing their dividend payout ratios in order to meet new, higher, capital management requirements. Morgan Stanley believes the locally focused banks remain in an earnings per share and return on equity downgrade cycle, with the risk of further dividend cuts. Macquarie, as a globally focused bank, is the exception, and is seen as being in an earnings and return on equity growth cycle.
Last year both NAB and Westpac cut dividends, much to the consternation of shareholders, while ANZ cut franking credits. CBA is the only major bank to avoid cutting dividends or franking credits post the Royal Commission.
Foolish takeaway
The major banks have a long, difficult road to travel if they are to return to the position they occupied pre-Royal Commission. Whether this is even possible is a legitimate question. Increased competition and regulatory requirements mean the banking industry has fundamentally shifted over the last couple of years. A new normal is emerging, and industry players must find their place in a changed landscape.
