Sykesnado intensifies as ANZ moots dividend cut

The Sykesnado began last August when former journalist legend turned Domainfaxman, Trevor Sykes, pushed all and sundry to enter the big banks:

Broadly, all the Big Four enjoyed a run from 2011 until early this year, but since then they have slid quite abruptly.

There were two reasons for the fall. The first was that the Australian Prudential Regulation Authority was tightening the required Tier 1 capital ratios for the big banks to bring them into line with overseas requirements.

The second was that the APRA move prompted a whole chorus of Jeremiahs to begin singing that the banks were overvalued.

Maybe they were, but not by much. The Big Four look as sound as any in the world. They certainly look stronger than most of the Continental banks which are holding sovereign debt of shaky European nations.

Indeed, a cynic would suspect that the higher Tier 1 requirements here are merely an exercise in backside-covering by APRA just in case there is a banking panic at some later time.

…So it’s good news for anyone holding any of the big four. If you don’t hold any of them, perhaps it’s time you reviewed your portfolio.

Since then ANZ Sykesnado has torn punters a new one:

tvc_16e031704dc7d0e7db9c77abfab95e82

The Sykesnado rationale was all about dividends which it was clear were not sustainable. For The Australian today:

New ANZ chief Shayne Elliott has opened the door to cutting the bank’s dividend and flagged a greater overhaul of its financial targets, as he firmed up his senior team in preparation for the more challenging environment.

But Mr Elliott, who replaced Mike Smith this month, said the bank’s highly valued ­dividend was just “one of the things that might give” if the ­slower environment and rising capital requirements tightened around its neck.

“You could make a reasonable case to say that’s the one that gives,” Mr Elliott toldThe Aus­tralian, after Morgan Stanley analysts forecast that the dividend would be cut 20 per cent in the second half to 69c.

“But there are others and there’s a lot of variables here and there are other actions banks can take around costs, about the capital intensity of businesses, about the businesses they choose to keep. So it’s an option. Our point is, it’s not the only option.”

Dividends are being scrutinised as weaker earnings push up payout ratios, with CLSA this week also urging Commonwealth Bank to shrink its interim dividend next month amid ongoing regulatory headwinds and several analysts questioning NAB’s ability to maintain payouts.

Mr Elliott said he had not taken “a lot of comfort” from recent suggestions by the Basel Committee that the pace of rising capital requirements may slow, saying he expected “more intensity on that, not less”.

Where one goes others will follow. As Mr Elliott hints at, this is the beginning not the end. Further dividend cuts will come over the next few years not just as capital intensity increases but as the banks post-2011 strategies of throwing every spare penny out the door to shareholders to offset their strategic weaknesses unravels. That strategic weakness is the economy, or more to the point, lack thereof. As the mining bust has taken hold, the banks themselves have become the only part of it still growing. But that cannot last as the cycle matures, bad loans begin to mount, loan loss provisions rise, regulators close in and global economic shocks come to bear on funding costs.

Macquarie has the right idea via Banking Day:

Bank earnings per share will fall by as much as 12.5 per cent this financial year, according to a Macquarie Securities report.

In an extensive report on the sector, Macquarie said increases in bad and doubtful debts, slower housing finance growth, lending competition and higher funding costs would all act as drags on bank profits.

Macquarie is expecting ANZ’s earnings per share to fall by 0.3 per cent in 2015/16, Commonwealth Bank’s by 4.3 per cent, National Australia Bank’s by 12.5 per cent and Westpac’s by 3.6 per cent.

Among the smaller banks, Macquarie expects Bendigo and Adelaide Bank’s EPS to fall by 7.4 per cent in 2015/16 and Bank of Queensland’s by 1.9 per cent.

Macquarie said NAB’s dividend would be difficult to sustain and there was some risk that ANZ’s dividend would also fall. It said CBA and Westpac had sustainable dividend levels.

On the positive side, banks were able to re-price their mortgage books last year and will probably do so again this year

“We expect banks to further re-price their mortgage books by ten to 15 basis points – the key upside to margins,” Macquarie said.

…Macquarie said credit quality would deteriorate in non-housing loan portfolios, especially those exposed to commodity price falls. The big banks each have A$15 billion to $20 billion of loans to the resources sector.

“This is a small parts of their total books but losses are likely to be material,” Macquarie said.

Bad and doubtful debt charges on non-housing loans were an average of 41 bps last year – well below the cycle average of 75 bps.

Macquarie said: “Normalisation to mid-cycle levels would take about five per cent off the [big] banks’ earnings. However, we don’t expect BDD charges to revert to mid-cycle levels in the next two years.”

That’s the beginning, yes, then comes the global shock.

For ANZ in particular history appear to be repeating, from Chanticleer:

New chief executive Shayne Elliott made it clear on his first major public outing that he and former CEO Mike Smith are like chalk and cheese.

…ANZ was going to deliver higher returns by becoming the premier banking intermediary for Australian and New Zealand companies doing business in Asia.

Rival bankers always wondered why ANZ with its strong business and retail banking franchise in Australia and New Zealand would be able to achieve superior returns when up against banks with long-standing Asian businesses such as HSBC, Standard Chartered and Citi.

Goodness, long standing competitors in Asia like Standard and Chartered which bought India’s Grindlays network from ANZ in 2000? For one reason or another, it seems Australian banks are unable to sustain investment in Asia across the cycle. You might argue that the expansion is ill-founded in principle, and the Australian stock market clearly doesn’t like it,  but given the deteriorating medium term Australian outlook, especially for the banking economy, a little Asian earnings diversity is shaping up as a nice strategic asset.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Both ANZ and CBA might easily have been drawn too deep into Chinese financial situations through their Asian offices funding Aussie real estate purchases. I wonder what their yuan positions are like and especially how liquid these positions and their hedges are ?

  2. How is your list of dollar exposed industrials going?.
    Time for you to start your own advisory, not.

    • Beg your pardon? They outperformed the market by some spectacular margin for three years and I noted it was probably wise to sell the rallies some months ago.

      Not that that is relevant. This post is about the banks and Trevor Sykes. Are you suggesting I should let ’em all off the hook? If so, why read this blog?

      • HnH, you have stated many times that you do not give investment advice (not qualified), so how therefore can you comment on those who do?

      • What an odd perspective to hold, WW.

        I appreciate any commenter here taking HnH to task when he misses something. I also appreciate HnH taking the “experts” to task when the data supports the critique (it makes the subscription worthwhile).

        Are you suggesting the data does not justify the criticism in this case?

    • WW, so that is your contribution right here? HnH’s contribution is much more than yours, unfortunately. Why don’t you start a blog and let us read and see how you go before you go and criticise another analyst?

  3. expect to see some major changes coming through ANZ. Elliot has been a critic of the ‘Asia at all costs’ mantra for some time, and the Board placing him as CEO shows endorsement for his path.

    He will cut costs like a madman, particularly in Asia. ANZ has no real strategy in Asia other than borrowing money in London / NY and channel it into Asia short term to take advantage of funding arbitrage.

    ANZ has been very poor at building a true franchise in Asia beyond lending to some governments, banks and large corporate, as shown in their Pillar 3 disclosures. There is no true penetration of the likes that HSBC has. If you look at ANZ’s website, you will see they are spread very thinly across some very high risk countries, most of which are generating low risk adjusted returns and are ripe for an Asian blackswan.

    Elliot probably won’t go as far as pulling fully out of Asia, but expect heads to roll and some big one off write offs.

    • Australian ‘Banking’ is carry trade. That seems to be its only purpose and as that strategy (for want of a better word) reverses, Banks returns and share prices will suffer heavy adjustments.