UBS: Banks to slash dividends

Via the excellent Jonathon Mott at UBS:

Bank reporting season begins on 31st October. We expect another complex set of numbers given divestments, remediation charges and other “one-off” items in both this half and prior periods. However, we believe that 2H19E will be a high water mark for the sector as the outlook deteriorates in an ultra-low rate environment. Key 2H19E expectations (seq.): (1) Underlying sector revenue is expected to fall 1%; (2) NIMs benefitted from a lower BBSW-OIS spread this half, but rate cuts, deposit pricing, competition and the run-off of hedges/replicating portfolios will be a drag; (3) Volume growth +1%, as rising lending volumes are offset by accelerated paydowns and Majors lose share. Business credit growth also remains subdued, particularly in SME; (4) Cost out is challenging, +1.5% even excluding higher remediation and divestments; (5) This leaves ‘Underlying’ Pre-Provision Profit down 2.5%; (6) Asset quality is likely to remain stable as a rise in house prices reduces tail risk. Credit impairment charges are likely to rise off the bottom, particularly as IFRS 9 is more procyclical; (7) Capital is under pressure given deductions, recent regulatory announcements (APRA reducing double leveraging and enforcing exposure limits) and finalisation of RBNZ Capital Review; (8) Dividends remain at risk if interest rates are cut further or QE is undertaken.

We expect ANZ’s dividend policy to be a key debating point given APRA and RBNZ reviews…We now expect WBC to cut its dividend from 94cps to 84cps this half, and offer a discounted DRP.