The Westpac Banking Corp (ASX: WBC) share price has come under pressure on Wednesday.
In afternoon trade the banking giant's shares are down 4% to $15.44.
Why is the Westpac share price sinking lower?
Westpac and the rest of the big four banks have come under pressure today after the APRA contacted all authorised deposit-taking institutions (ADIs) and insurers regarding their capital management.
APRA told the banks and insurers to limit discretionary capital distributions in the months ahead, to ensure that they maintain the capacity to continue to lend and underwrite insurance. This includes prudent reductions in dividends, taking into account the uncertain outlook for the operating environment and the need to preserve capacity to prioritise these critical activities.
This request has already impacted one bank. Much to the disappointment of income investors, this morning Bank of Queensland Limited (ASX: BOQ) released its half year results and elected to defer its interim dividend.
This has sparked fears that the big four banks may follow suit when they next release their results.
How safe is the Westpac dividend?
Unfortunately, I think there is zero chance of Westpac maintaining its $1.74 per share dividend in FY 2020. Though, that would have most probably been the case regardless of APRA's request and the coronavirus pandemic.
The question now is what dividend will Westpac pay in FY 2020? This is very difficult to estimate. As well as the tough trading conditions it is facing, Westpac has a potentially substantial fine coming its way in the next 12 months. This is due to the civil proceedings that were brought against it by ASIC in relation to its anti-money laundering failures.
Because of this, I think there is the potential for its interim dividend to be suspended this year. Though, I'm optimistic it will not be the case.
In response to APRA's request, analysts at Goldman Sachs have suggested that Westpac and the rest of the big four will continue to pay dividends. However, it had already reduced its expectations significantly.
For Westpac, the broker expects its dividend to be cut by 34% in FY 2020 to approximately $1.15 per share. This works out to be a fully franked forward 7.4% dividend yield based on its current share price.
Whilst this reduction will be disappointing for existing shareholders, it remains very attractive for non-shareholders looking for exposure to the banks.
