UBS: More rate cuts will cut bank dividends


Via InvestorDaily.

UBS reported that it was cautious on the Australian big four banks as the low rates environment made it harder for the banks to generate a lending spread and challenged the return on equity.

“If the housing market does not bounce back quickly, this could put material pressure on the banks’ earnings prospects over the medium term, implying that the dividend yields investors are relying upon come into question once again,” said the report.

Recent regulatory actions had also not helped the outlook, with the recent confirmation by APRA that it was going ahead with its proposal to reduce related party exposure limits to 25 per cent, in a move already impacting one bank’s capital abilities.

ANZ announced shortly after the confirmation that it would have limited capacity to inject fresh capital into NZ as its NZ subsidiary would be at or around the revised limit.

The $500 million operation risk change for ANZ, NAB and WBC would lead to a 16-18 bps reduction in CET1, with Westpac revealing in its third quarter report that it was running thin on capital, with UBS reducing it’s CET1 forecast in the bank to just 0.49 per cent, below APRA’s unquestionably strong minimum.

Of the major banks, UBS estimated that Commonwealth Bank was the in the best capital position, followed by ANZ, but both NAB and Westpac were in trouble.

Part of the capital position of CBA and ANZ was due to asset sales that would boost sales; however, UBS did note that these divestments had not yet been completed and there was uncertainty around its settlement.

UBS said many of these behaviours were due to APRA’s interpretation of the Murray report that said the regulator should set capital standards that kept institutions unquestionably strong.

“This recommendation, which was subsequently accepted by the government, was interpreted by APRA to mean that the major banks’ level 1 CET1 ratios are at least 10.5 per cent.

“However, we believe that if the Australian banks (level 1) hold substantial positions in their New Zealand subsidiaries, which are treated as a 400 per cent risk weight rather than a capital deduction, then double-gearing of capital brings this ‘unquestionably strong’ mandate set by the FSI into question.”

UBS said a simpler test was needed to ensure banks did not become overly reliant on capital repositioning strategies, which effectively double-counted capital in Australia and New Zealand.

Until this was done, UBS predicted that banks would continue to cut dividends and that investors would see through various strategies to ensure double-gearing did not occur.

“We expect CBA and WBC to join ANZ and NAB in cutting dividends should rates continue to fall.”

I can hear the aged scream already.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.