If you thought the worst of the COVID-19 dividend cuts were over for the ASX big banks, think again!
There's one bank in particular that could deliver more dividend pain even as the economy recovers from the impact of the pandemic.
Dividend downgrades were commonplace during the August reporting season with the big four banks slicing or suspending their payouts.
Big banks' sorry dividend story
These include the Commonwealth Bank of Australia (ASX: CBA) as it chopped its latest payment by 58% to $0.98 a share and National Australia Bank Ltd. (ASX: NAB), which lowered its dividend to $0.33 from $0.83.
Australia and New Zealand Banking Group (ASX: ANZ) deferred its interim dividend from May and only just paid a $0.25 distribution, while Westpac Banking Corp (ASX: WBC) cancelled its half year dividend.
Mind you, the banks aren't the only ones guilty of being dividend disappointers. Several other S&P/ASX 200 Index (Index:^AXJO) companies followed the same route.
Record $1.3bn fine lifts WBC's dividend risk
But the market believes the dividend risks is now behind largely us and the next payments can only be better.
That's largely through, but maybe not so for Westpac as it's seen by experts as having the weakest balance sheet among the big four.
It's record $1.3 billion fine for money laundering is a big reason for the dour view. This is the largest fine ever dished out in Australian corporate history and Westpac only provisioned around $900 million for the disgraceful act.
Will Westpac pay a final dividend for FY20?
While the market believes CBA, ANZ Bank and NAB will have little trouble paying the next dividend instalment (and I think it will probably be higher than their last payment), the jury's out for Westpac.
There is a chance that management will cancel or defer paying a final dividend when it hands down its full year results in November.
The move will almost certainly cement Westpac as the worst performing big bank stock for 2020 as its peers pull out their dividend check books.
Best case dividend scenario still looks gloomy
However, Morgan Stanley believes it won't come down to that. While it acknowledges the risks, the broker believes Westpac will still pay a final dividend, albeit a tiny one.
It was forecasting a 30 cent-a-share payment, but lowered this to 25 cents given the Australian banking regulator's guidance for banks to cap their payout ratio to 50% of profits.
"Risk is still skewed to the downside given the potential for larger write-downs and the need for the Board to adopt a conservative approach at this point in the cycle," said Morgan Stanley.
"A 25c dividend would use ~20bp or ~A$0.9bn of capital and imply an ex dividend CET1 ratio of ~10.7%. This suggests just ~A$1.0bn above APRA's 'unquestionably strong' target of 10.5%."
Capital raising risk
That's cutting it a little close and management may need to raise some capital. It doesn't make sense to me to pay a dividend and do a cap raise, although that's what NAB did earlier this year.
On the other hand, Morgan Stanley thinks it's more likely that Westpac will sell assets rather than new equity.
Shareholders would hope so given how depressed the Westpac share price is.
