Since COVID-19, investors may have gotten used to the big four ASX bank shares growing their dividends every year. However, Macquarie thinks that's not likely to continue.
Bank dividends are influenced by whether they can grow their profit and how much capital they hold.
Macquarie thinks conditions aren't going to be as supportive for dividend growth in the foreseeable future.
Let's look at which banks are most at risk of dividend cuts.
Macquarie's warning on dividends
The broker is currently forecasting that owners of National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC) shares could see a dividend cut because capital could become "constrained" at the current level of dividend payouts.
The broker also suggested that ANZ may not complete its share buyback.
Why is the passive income outlook weaker?
After seeing the big bank results, Macquarie noted that pre-provision earnings trends were weaker (excluding Commonwealth Bank of Australia (ASX: CBA) ). Pre-provision earnings fell between 2% and 3% (adjusting for markets income) because of softer revenue, while headline earnings were supported by persistently low impairment charges.
The key positives were stronger markets income and supportive credit (loan) quality.
Macquarie said that weak organic capital generation and common equity tier 1 (CET1) levels are approaching capital targets of 11.75%. In other words, the big four ASX bank shares are still well capitalised, but those capital levels have reduced in the last few years as banks have given shareholders outsized dividends and share buybacks.
The broker also pointed out that as banks reach capital floors, inorganic capital generation will also "be diminished".
In addition, banks are facing headwinds from rate cuts and a normalisation of bad and doubtful debts. Banks are currently earning strong returns on money held by customers in transaction accounts (which don't pay interest). Rate cuts will reduce the loan interest rate that banks can lend out the money at.
Macquarie thinks the market is not fully factoring in the effect of lower rates on bank margins, with earnings per share (EPS) downgrades "likely" as FY26 gets closer.
While ASX bank shares continue to target dividend payout ratios of between 65% to 80%, Macquarie thinks the banks will struggle to maintain the current dividends.
Which ASX bank share does the broker prefer?
The broker is pessimistic (underweight) on the ASX bank share sector. Westpac is its least preferred bank (and has an underperform rating). Its preferred exposure is NAB shares, which have a neutral rating.
