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The ASX bank dividend recovery may be better than what the market thinks

The recent strong run in ASX bank share prices is a sign that the value trade is finally springing back to life.

For the longest while, it was growth stocks like tech that dominated while value stocks played second fiddle.

Investors are rediscovering their taste for these laggards in the big post COVID-19 rebound!

Zero to hero

Financials were the best performing sector on the S&P/ASX 200 Index (Index:^AXJO) today and over the last five trading days.

The rally was fuelled by the sector heavyweights. These are the Commonwealth Bank of Australia (ASX: CBA) share price, the Westpac Banking Corp (ASX: WBC) share price, the Australia and New Zealand Banking Group (ASX: ANZ) share price and the National Australia Bank Ltd. (ASX: NAB) share price.

Shares in the big four jumped by at least 5% on Tuesday, and despite their recent outperformance, they remain significantly below where they were trading before the coronavirus outbreak.

The same can’t be said for other large cap stocks, and that’s what’s driving the big bank rally, in my view.

Better than feared

What is also helping drive the sector higher is the realisation that the COVID-19 disaster isn’t going to do as much damage to the economy as previously thought.

Treasury is the latest to admit it was too pessimistic as it upgraded Australia’s peak unemployment rate to 8% from 10%, reported Business Insider.

The better-than-Armageddon outlook is one reason why Citigroup released a bullish report on the sector.

Dividends on the comeback

While loan deferments and the government’s stimulus support packages end in September and pose a risk to the economy, the broker thinks the deadline may also be a blessing.

“A ‘Rip the BandAid off’ approach by the banks is set to accelerate mortgage impairments, bringing housing losses to fruition,” said Citi.

“However, an outcome of managing balance sheet risk will be in providing a pathway to dividends being reinstated.”

That will be music to the ears of investors as dividends are the main reason why retail investors buy bank stocks.

Don’t underestimate the dividend recovery

ANZ Bank and Westpac opted to defer paying their interim dividends until the coronavirus dust settled, while NAB took an axe to its latest distribution. CBA reports on a different earnings cycle and will only declare its interim dividend in August.

“We forecast higher than consensus dividend growth out to FY22 on milder than expected loan loss outcomes,” added Citi.

“This should see stock prices continue to move higher based on attractiveness of their dividend yields.”

The broker is recommending all the big four banks as a “buy”.

Another to bank on

But it isn’t only our ASX domestic banks that are benefiting from the improving outlook for the broader economy.

The Macquarie Group Ltd (ASX: MQG) share price also made a strong recovery with V-shaped bounce in global markets likely to provide a tailwind to the investment bank’s earnings.

The stock is a “buy” in my book as I think there’s more upside for the Macquarie share price.

Where to invest $1,000 right now

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

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