Are the big ASX banks a buy for dividends due to the selloff caused by fear about the coronavirus impacts to the economy.
What's going on with the big ASX banks?
Let's look at how the share prices of the big ASX banks have performed since 21 February:
The Commonwealth Bank of Australia (ASX: CBA) share price is down 30%.
The Westpac Banking Corp (ASX: WBC) share price is down 38.2%.
The Australia and New Zealand Banking Group (ASX: ANZ) share price is down 39.3%
The National Australia Bank Ltd (ASX: NAB) share price is down 41.3%.
I think that's some painful declines in such a short time. Don't forget they were down even more a few weeks ago.
The coronavirus outbreak has caused a huge blow to the economy. Many businesses are shut and not earning their normal cashflows. Lots of individuals have lost their jobs and are now being supported by the government's jobkeeper or jobseeker payments. And the human toll is terrible.
I believe the big ASX banks are particularly vulnerable in this period because of a number of reasons:
New Zealand bans dividends
The Reserve Bank of New Zealand (RBNZ) has asked New Zealand banks not to pay dividends during this period so they stay strongly capitalised. This quarantines the profit made within New Zealand for the time being. This is likely to mean smaller ASX dividends.
Lower profit margins
The main source of profit for the banks is the net profit margin (NIM). The lower the official interest rate the harder it is for banks to maintain their NIMs. This leads to lower profits.
Lower profits are going to reduce the value of the bank and potentially cut the dividend.
Higher bad debts
I think this period is obviously going to be very tough for borrowers who lose their income. I hope most borrowers don't have to do anything too drastic to stay afloat financially. But It's inevitably going to lead to higher bad debts in some areas of the economy.
Higher bad debts mean lower profits, a lower valuation and a potential cut to the dividend.
Payment holidays
Borrowers can ask banks for a repayment holiday if they're in financial trouble. I think it's good that this is possible to do.
However, interest and fees may keep accumulating. Even if there is accumulation of interest and fees, the cash repayments aren't currently heading back to the bank. That means the big ASX banks won't be receiving the expected cash return from that loan to pay the dividends.
The major banks are expected by society to shoulder a lot of the burden through this.
Are the big ASX banks good value?
I think we need to accept that the banks are going to cut dividends during this. APRA has already asked them to. How much are banks going to cut? I'd guess at least 20%. It could be more. Maybe 33%, perhaps 50% (or even more!).
Let's assume a 50% cut to be fairly pessimistic for today's prices:
CBA would have a grossed-up dividend yield of 5%.
Westpac would have a grossed-up dividend yield of 7.2%.
ANZ would have a grossed-up dividend yield of 6.2%.
NAB would have a grossed-up dividend yield of 7.4%.
These aren't bad yields at all, but I think there's a danger that the cut is even bigger than 50%. Or suspended altogether, depending on the economy's pain. I should also remind you that Westpac and NAB may be getting large financial penalties in the short-to-medium-term.
Banks may be decent investments for the longer-term at these prices. But I think there are plenty of growth shares which have been hit as hard which have better growth prospects.
