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The embattled ASX 200 stocks that could deliver a dividend surprise

There’s a sector that could deliver an unexpected dividend surprise at the upcoming profit reporting season.

This isn’t the mighty miners like BHP Group Ltd (ASX: ASX: BHP) and Rio Tinto Limited (ASX:RIO) – even though their strong balance sheets certainly puts them in a good position to be generous with they payouts.

The unlikely dividend heroes I am referring to are the ASX big banks. They include the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, the Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price.

ASX banks falling off a cliff

That may sound surprising given that banks are hard hit by the COVID-19 turmoil and are facing the so-called dreaded “fiscal cliff”.

The cliff refers to the September expiry of the government’s wage and other fiscal support programs that are keeping consumers and small businesses on their feet.

The fear is that ASX banks will suffer a wave of loan delinquencies in the next few months, which is why the banks are extending their loan repayment holiday for a further four months after September.

Impact of new loan holiday on banks

On the face of it, the loan extension may be seen as a negative for bank profits and dividends. But a number of brokers, including Citigroup, are believe this is more positive than negative.

The repayment reprieve extension won’t be applied carte blanche like the original support program. Borrowers needing further relief will need to show that they will be able to repay their debts in the post COVID-19 economy.

The extension will allow the banks to manage a number of key risks, according to Citigroup. This includes the second lockdown of the greater Melbourne region and Mitchell Shire, the winddown of fiscal stimulus and ongoing disruptions to vulnerable sectors like tourism and hospitality.

Capital ratio relief

Further, the banking regulator APRA is providing regulatory relief on the capital requirement for loans. This means banks won’t need to hold extra cash to buffer themselves against underperforming loans like they would normally have to.

This capital relief will last till end of March next year and not having cash tied up in a safety net will pad the banks’ bottom line.

“Loans that are restructured prior to 31 March will also be treated as performing for capital and reporting purposes, which we view as a favorable [sic] outcome for the sector,” added Citi.

ASX bank stocks to buy

The broker believes that the market’s worry about the sector’s bad debts are overblown and that the milder than expected loan losses will drive higher than expected dividends out to FY22.

Citi is recommending all the big bank stocks as “buy”, but prefers NAB followed by Westpac then ANZ bank and CBA.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, Commonwealth Bank of Australia, National Australia Bank Limited, Rio Tinto Ltd., and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. 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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