UBS: ANZ issues moral hazard dividend

Via the excellent Jonathon Mott at ANZ:

3Q20 ahead of expectations. Boosted by strong trading and lower bad debts
ANZ Cash NPAT $1.5bn, ~$200m above UBSe. Highlights (vs 1H20 ave): (1) Revenue significantly higher than expected. Trading income rose 60%, implying ~$930m in 3Q. This compares to targeted trading income of ~$1.8bn p.a.; (2) Excluding markets, revenue fell slightly given a sharp reduction in NIM (down 10bps to 1.59%) and lower fee income; (3) Underlying costs fell 1%; (4) Credit impairment charges $500m (31bps of Gross Loans), roughly equally split between collective and specific provisions; (5) CET1 higher than expected at 11.1% due to lower RWA (FX and lower Insto CRWA).

Is paying a belated 25cps 1H20 dividend prudent?
ANZ announced it will pay a belated interim dividend of 25cps for 1H20, after ‘deferring’ its dividend in May. It stated this took into account its capital position, APRA guidance, “shareholder needs” and economic uncertainty. However, with around 1/3 of the Australasian population still locked in their homes across Victoria and Greater Auckland, the deepest Recession in a lifetime with 12% of mortgages and 14% of business loans still on repayment deferral, we question whether this is prudent. Many shareholders (many of them retail) invested in ANZ for its high yield prior to COVID-19. This high yield reflected ANZ’s risk (investing in the equity tranche of a leveraged financial institution). While ANZ and the other banks provide strong, reliable dividends during robust economic conditions, we believe shareholders should not necessarily expect dividends to be paid during recessions or periods of elevated uncertainty. We believe paying a dividend, however modest, in the current environment to satisfy the financial “needs” of one cohort of shareholders is not necessarily in the interests of all shareholders, especially with ANZ trading at 0.8x book and using a DRP to help fund it.

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