Believe it a not, there's a silver lining to the market collapsing. Shares in our big four banks are finally starting to look appealing again from a valuation perspective.
That sounds crazy in the midst of the market mayhem, which has wiped around 30% off the value of the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) and the losses will accelerate this morning given the big sell-off on Wall Street overnight.
Bank stocks have taken a bigger battering. The National Australia Bank (ASX: NAB) share price took the brunt of the beating with a more than 40% decline in the past month.
The Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) share prices have faired a little better, but not much.
Earnings and dividend downgrade
The key issue is that investors are having difficulty predicting the earnings impact of the COVID-19 economic shutdown on their bottom lines. By extension, it's hard to predict how deeply the banks will have to cut their precious dividends.
The bigger question is how much further can their share prices fall, but that's anyone's guess in this volatile climate. Answering the question on how big the dividend cuts could be might be easier.
The analysts at Macquarie Group Ltd (ASX: MQG) have downgraded their earnings forecast for the majors by between 1% and 6% and believe the risk of a dividend cut are rising.
Why dividend cuts could be coming
"In this environment, we expect the Boards to become more conservative around capital preservation and see an increased likelihood of more aggressive dividend cuts," said the broker.
"As banks' share prices are approaching or are falling below NTA [net tangible assets], the rationale for issuing additional stock to support elevated payout ratios is increasingly difficult to justify."
The biggest and smallest cuts
Westpac's FY20 dividend represents the biggest downside. The broker is forecasting a 16.1% cut to WBC's full year dividend, which takes it down to $1.46 a share. NAB is tipped to lower its dividend by 10.2% to $1.49 a share, while CBA and ANZ Bank are expected to be able to hold their FY20 dividend steady.
However, Macquarie doesn't think ANZ Bank can sustain this and is expecting the bank to cut its dividend by 13.6% in FY21, while CBA is forecast to lower its dividend by 7.2% in the same year. Both WBC and NAB are expected to trim their dividends yet again by around 5% each.
Foolish takeaway
But even then, the yields on the big banks are looking very attractive. For instance, WBC is on a near 12% yield on Macquarie's FY21 forecast and Monday's closing price, if you included franking credits.
Meanwhile, Morgan Stanley lowered its dividend forecasts for the big four by 11% on average for FY20 but it upgraded its recommendation on NAB to "overweight" as it thinks the sell-off in the stock is overdone.
