UBS cuts major bank dividends to zero

Via the excellent Jonathon Mott at UBS:

ADIs expected to “seriously consider” deferring decisions on dividends

Following recent announcements suspending bank dividends by several global regulators, APRA stated that it expects all ADIs (Authorised Deposit Taking Institutions) and insurers to “limit discretionary capital distributions in the months ahead” and instead use these capital buffers to maintain lending capacity to support the economy. Further, APRA stated that “During at least the next couple of months” it expects ADIs “will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”. Where a bank is confident it can pay a dividend following “robust stress testing that has been discussed with APRA, this should nevertheless be at a materially reduced level and offset to the extent possible through the use of Dividend Reinvestment Plans and other capital management initiatives.”

APRA announcement may be open for interpretation or clarification

While we believe the broad intention of APRA’s announcement is clear, several elements are open to interpretation. For example, the time frame this applies to is “at least the next couple of months,” which includes the upcoming April/May reporting season for ANZ, NAB and WBC [does it also apply to Macquarie Bank, a subsidiary of MQG?]. However, it further states that these restrictions should also apply “until the outlook is clearer.” We believe it is hard to have a “clear” view on the outlook on the economy until the wage subsidy (applies to 6m of Australia’s 13m workforce) and the loan deferrals (likely to apply to hundreds-of-thousands of mortgages and SME loans) come to an end in six months’ time. How do you run a stress test on almost half the workforce being temporarily paid by the government? How many of these loans will fall into delinquency in October? Further, APRA recommends banks which still pay a dividend offset this with DRPs. DRPs are highly dilutive when banks are trading below book value, which ANZ, NAB and WBC currently are. The strategy of overpaying dividends and offsetting this by DRPs does not work when you trade sub-book value.

We cut ANZ, NAB and WBC 1H20E dividends forecasts to zero

This follows our ~35% cut to dividend forecasts yesterday. We have maintained our 50c 2H20E dividend forecast for each of these banks (in Nov) but this is also at risk. For CBA (June year-end), we have left our 2H20E dividend forecast unchanged at $1.60 (down 30%). However, this is at risk of being cut further or suspended. We have not changed our MQG dividend, awaiting clarification. We remain Neutral on the banking sector following the recent correction, although this announcement is a clear negative.

David Llewellyn-Smith
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