The dividend payout ratios of Australia’s largest banks are high, not only from a historic perspective but also compared to global peers. They have continued to increase since 2010/11, despite a lift in capital requirements and recent decline in return on equity. As a result, the likelihood of dividend cuts is rising.
That’s the view from Richard Wiles, Matthew Dunger, Daniel Toohey, Andrei Stadnik and Edward Pham, researchers at Morgan Stanley Australia, who suggest recent results from Australia’s largest lenders point to an increased chance that dividends will be lowered in the years ahead.
The chart below shows the dividend payout ratios for Australia’s big four banks, comparing 2014/15 levels to those seen in 2010/11.
“Broadly for the major banks, we think that rising loan losses against the backdrop of higher capital intensity could be the trigger for a review of dividends,” the analysts say.
“Our updated sensitivity analysis highlights that impairment charges at 100 basis points of non-housing loans would push payout ratios to 80%, which we see as the ‘grey area’ for dividend cuts.”
They see downside risks for the sector from rising loan losses, further capital build, higher funding costs and an increased probability of dividend cuts, and retain a negative stance on the major banks. The have an underweight stance on ANZ and the NAB, and and an equal weight rating on CBA and Westpac.
The warning on dividends from Morgan’s echoes a similar view to that of Konstantinos Venetis, economist at Lombard Street Research, who earlier this year warned that there was a looming dividend cliff about to hit Australian financials.
“Despite the deceleration in earnings, dividend payout ratios have surged from 55% to well over 70% in the last four years,” wrote Venetis in May.
“High dividend yields have been instrumental in helping the bank-heavy ASX 200 benchmark index shrug off the end of the commodity supercycle. However, this tailwind is weakening.”
Australia’s banking stocks – once high-flying – have endured a tough seven months. The ASX 200 banks index, having hit a high of 10412.9 earlier in the year, has now fallen by close to 25%.
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