ASX bank shares such as Commonwealth Bank of Australia (ASX: CBA) have been on a tear over the last few weeks. Even though CBA shares have pulled back today (at the time of writing), they're still up more than 17% since 25 May.
And it's not just CommBank. The other ASX major banks Australia and New Zealand Banking GrpLtd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all seen similar, if not more enthusiastic moves in recent weeks.
Now, that's all well and good for any shareholder that picked up ASX bank shares any time over the last 2-3 months.
But what of the long-term prospects of our big 4? Well, one ASX fundie isn't betting the house (or even the barn) on a triumphant return to banking supremacy and flowing ASX bank dividends.
Are ASX bank dividends in trouble?
According to reporting in the Australian Financial Review (AFR), Airlie Funds Management's portfolio manager, Matt Williams is holding a more bearish view of the banks for the coming months and perhaps years. Williams has stated that the banks are set to bear the brunt of the withdrawal of various government stimulus measures.
The federal government has embarked on the largest social spending program in history. Measures like JobKeeper and the coronavirus supplement payments for those on JobSeeker and other government payments launched in an attempt to blunt the edge of the coronavirus' impact on the economy.
But, as Williams points out, these measures were never designed to be permanent and are heading towards a wind-down phase in the coming months. When this happens, Williams warns that the banks will bear the full impact of this cliff:
"They are the backstop for all this and how this plays out over the rest of the year… we've got 10 per cent of mortgages on deferral [and] 6 per cent of SME loans on deferral. So … as some of the stimulus is withdrawn, what's going to happen to the bad and doubtful debt charge?"
As a result of this, Mr Williams is saying the banks will struggle to return to paying the level of dividends investors have become accustomed to in the past, stating:
"I think that's clear from the crisis, they are paying too much in dividends. I think conservative boards will really rein in that payout ratio. So I think with dividends shrinking a bit, it's hard… to make a really strong bullish case for the banks."
What does this mean for ASX investors?
I think Mr Williams has a very strong point here. And anyone who holds ASX bank shares should be thinking very carefully today about what to expect from their banks over the coming years. There are a lot of headwinds right now in the banking sector, without the company of too many tailwinds. Low-interest rates aren't good for bank's profitability or their ability to fund dividends. Neither is sluggish economic growth and reduced appetites for credit. These are all factors the banks are facing today (and will probably continue to face for years).
As such, I have to agree with Mr Williams in not being too bullish on the future of the banks for the next year or so – especially from a dividend investing perspective. Farther than that? Frankly, who knows. But it's not a risk I'm willing to take today, that's for sure.
