One of the biggest shifts in sentiment we have seen so far in 2020 on the S&P/ASX 200 Index (ASX: XJO) is arguably in the banking sector. ASX bank shares have had a shocker of a year, if the numbers are anything to go by.
The ASX's largest bank, Commonwealth Bank of Australia (ASX: CBA) actually hasn't faired too badly. The CBA share price was trading at $79.88 at the start of the year, just a whisker above the current share price (at the time of writing) of $77.91. However, the high of $91.05 that CBA saw in February (just before the coronavirus-induced market crash) still looks out of reach (for now anyway).
But it's a different story for the other big four banks. The National Australia Bank Ltd (ASX: NAB) share price is sitting at $22.47 today after rising more than 15% over the past month. But that's still 8.5% below where NAB shares were on 2 January, and more than 18% off their February highs. It's a similar story with Australia and New Zeland Banking Group Ltd (ASX: ANZ) shares.
But Westpac Banking Corp (ASX: WBC) is arguably the ASX bank that has faired the worst. The Westpac share price is today asking $19.79 after climbing 14% since 4 November. But Westpac is still more than 18% below where it was at the start of 2020, and more than 23% off its February highs.
ASX bank dividends to make a return?
One possible explanation for ASX bank shares being sold off could be due to the dividends they are paying in 2020 and beyond (or lack thereof). ASX banking shares have always had a reputation as income giants on the ASX 200, typically offering grossed-up yields between 5% and 8% in any given year.
But 2020 has seen dividends from this sector dry up considerably. Take Westpac. It didn't even pay an interim dividend in 2020 for the first time in at least three decades. And its final dividend for 2020, to be paid on 18 December, will come in at 31 cents per share, down from 80 cents per share in 2019.
But that could shift in 2021.
Part of the reason banking dividends have been so scarce in 2020 is because of APRA (the Australian Prudential Regulatory Authority). Back in May, APRA actually told ('guided' was the official term) the ASX banks to keep their dividends low for the sake of stability in the financial sector. As part of this 'guidance', APRA 'suggested' banks keep their payout ratios below 50% of earnings.
Dividend mana from APRA
But according to reporting in the Australian Financial Review (AFR) yesterday, APRA might be about to loosen this guidance. The AFR reports that APRA chair, Wayne Byres, speaking at the AFR's Banking and Wealth Summit, told participants APRA will "soon revise the 50 per cent earnings cap on dividend payouts to shareholders, indicating this may be relaxed".
The AFR quotes Mr. Byres as stating the following:
On the whole, I think the outlook has improved, bank capital has certainly increased, the economic situation looks more positive…We don't want to be complacent, but I think it is time we look at the issue [of the cap] again.
If that does come to pass, we could well see dividends from the big four banks tick up again in 2021 and beyond. If you were wondering why ASX banking shares have been so dramatically on the rise in November so far, you might have just found your answer.
