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Severe COVID-19 hit won’t destabilise ASX banks: Citi

Those worried about an Armageddon scenario for ASX banks can breathe a little easier.

A top broker crunched the numbers and believe the hit to the sector won’t be as bad as during the GFC – even under a “severe” scenario.

The news isn’t helping the big banks today though. The Commonwealth Bank of Australia (ASX: CBA) share price dipped 0.3% to $61.08, while Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) lost around 1% of their value each.

The losses come even as the S&P/ASX 200 Index (Index:^AXJO) is trading in the green – barely, but at least it’s still up 0.2% at the time of writing.

No cap raises tipped for banks

But desperate cap raises aren’t forecast for our big banks, unlike many others including Webjet Limited (ASX: WEB).

The move by the Reserve Bank of New Zealand (RBNZ) to prevent the big four ASX banks from taking dividends out of their NZ subsidiaries brought this risk further to the fore.

Australian banking regulators have said there are no plans as yet to stop banks from paying a dividend here and Citi thinks the Australian Prudential Regulation Authority (APRA) will not have a reason to change this stance.

How safe are bank dividends?

“We think a similar decision remains unpalatable at this time, given the ~$25bn in bank dividends plus ~$10bn in franking credits that would be removed, largely affecting self-funded retirees’ consumption requirements,” said the broker.

“With the RBA cash rate at 0.25%, there are no other alternative assets to provide income for consumption.

“This would require an additional fiscal policy fix.”

It pays to be cautious

This doesn’t mean banks won’t be cutting dividends though. The need to preserve cash for a “just in case” scenario is strong. No one can say with any certainty how bad the coronavirus recession will be.

But what’s looking more certain is that bank dividends are likely to be cut when three of the big four banks turn in their profit results next month.

Citi is predicting that ANZ Bank, NAB and Westpac will lower their payments by 10% to 18%. Luckily for CBA shareholders, the bank already reported and paid its interim dividend.

Foolish takeaway

Shareholders are unlikely to sulk over the dividend cuts though. This is more than factored into the share prices of banks.

Given the big liquidity squeeze on global markets, investors will be relieved that the banks can still cough one up – even a smaller one!

Citi rates the big four banks as “buy”.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Webjet Ltd., and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. 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.