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As CBA slashes its dividend, the brutal reality is bank shares have been dogs for 5 years, with more pain ahead

The Commonwealth Bank of Australia (ASX: CBA) share price rose today even as the bank slashed FY20 dividends by 31%. Investors were no doubt relieved to receive a final dividend following speculation none would be declared. Bank shares have long been a staple of dividend investors, however bank dividends are no longer as reliable as they once were. 

APRA imposes requirements for bank dividends

Back in April, the Australian Prudential Regulation Authority (APRA) put the banks on notice that they would need to carefully manage capital during the COVID-19 crisis due to expectations that loan losses would increase. The regulator subsequently provided guidance that banks should retain at least 50% of earnings. Commonwealth Bank’s 98 cent a share final dividend gave a payout ratio of 49.95% of second half statutory earnings. 

Bank dividends slashed  

Australia and New Zealand Banking GrpLtd (ASX: ANZ) was quick to react to APRA’s edict, deferring its interim dividend as profits slumped 51% thanks to $1 billion in extra reserves for coronavirus-related loan losses. Westpac Banking Corp (ASX: WBC) also deferred its interim dividend, noting it will continue to review dividend options over the course of the year. 

National Australia Bank Ltd (ASX: NAB) cut its interim dividend by nearly two-thirds to 30 cents a share, with profit for the 6 months to 31 March falling 52% compared to the prior corresponding period. CommBank was the only one of the big four that did not cut or defer interim dividends, paying a healthy $2 dividend in February. Some had speculated this would mean the bank could defer or cancel its final dividend, but today Commonwealth Bank declared a 98 cents per share final dividend.

When will we see a bank dividend recovery? 

Commentators have predicted any recovery in bank dividends is likely to be more u-shaped than v-shaped, with dividends remaining under pressure until the economy reflects the true cost of the pandemic. The big four banks have traditionally had dividend payout ratios of around 75%. Some forecasters predict banks will pay dividends at closer to a 40% payout level for the next couple of years.

According to the Australian Financial Review, bank dividend payout ratios may not return to pre-virus levels until 2022. With banks paying out a lower proportion of profit in order to manage capital, investors may be in for a significant wait before bank dividends return to levels seen in the past. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. 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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Kate O'Brien