Just when bank analysts were attempting to forecast the possible extent of dividend cuts for
-
-Dividends to be materially cut, deferred or suspended
-All hangs on the unknown extent of the crisis
"More worryingly, after a shocker of an FY19, is that FY20 is shaping up to be even worse."
This is an extract from Australian Banks: More Dividend Cuts To Come, published on
At the time,
This was the banking sector outlook back then:
"It is widely assumed the RBA will cut again to 0.5%, if not next month at least February next year (which will be the next meeting). The governor has oft declared that there's no point in cutting below 0.5%, rather "unconventional measures" will be required, which implies QE of some nature.
If we're into unconventional measures, we will be staring down a recession. The government is finally starting to wake up to the problem, but most suggest it's a case of too little, too late on the fiscal stimulus front.
The outlook for loan demand and thus bank revenue growth in FY20 remains subdued. To that end, and given all of the issues heretofore outlined, analysts suggest FY20 will be all about the banks desperately trying to hang on to what dividends they are now paying. Analysts are largely agreed more dividend cuts are on the horizon."
We'll never know if
We'll never know if the banks would have been forced into cutting their dividends meet capital requirements, because now everything has changed.
The Long Arm of the Regulator
This article had been intended to outline bank analyst assumptions with regard Australian bank dividends going forward in this crisis. But the news flow is moving very fast at this time. A quick summary: all of them decided dividend cuts were likely, if not unavoidable.
The
Soon after, dividend suspensions were also announced for
US banks may yet be forced to suspend dividends, but only if the crisis deteriorates markedly. (US bank dividend yield pales in comparison to Australian yields.)
No suspension does not mean dividends may nevertheless need to be cut.
It's all academic now, as yesterday
The regulator expects that all discretionary capital distributions, particularly ordinary dividends, to be deferred or "materially reduced".
It's advice, not instruction, but it does make any decision a lot easier for the banks, given it is assumed they were preparing to at least cut their dividends anyway. If retirees now miss out on much-coveted bank dividend income, blame
The banks can still pay dividends if they want, they might choose to pay a much smaller dividend, they might defer their dividend payment to a later date, or they might suspend the next dividend altogether. Note that
More on that in a minute. For now, the story so far, prior to
Back in the Red
In 2008, life as we knew did not much change. Retirement dreams were shattered, job losses and business failures followed, but not to the extent as many feared. The majority of Australians continued to work, businesses remained open, schools remained full and toilet paper was in abundance.
The Global Financial Crisis was just that -- a financial crisis. The threat of recession the Rudd government moved to avert with fiscal stimulus and the RBA supported with rate cuts proved overwrought. Labor supporters will tell you it was because of Rudd's actions a recession was averted, while Coalition supporters will tell you a lack of recession meant Rudd unnecessarily sent the country into budget deficit.
The GFC flowed out of the banks and into the economy. This crisis is flowing out of the economy and into the banks. In 2008 it was feared
Ahead of the GFC,
It is not without a certain irony that while it took a decade before Australian regulators settled on just what level of capital banks should carry so as to be prepared for the next GFC, the fact they finally did means
The last recession in 1990-91 in technical terms of consecutive quarterly contractions but arguably 1990-94 in impact -- was the result of a classic boom-bust cycle that did come out of the economy and flow into the banks. Unemployment and business failures soared, and Westpac ((WBC)) went very close to going under, but for white knight
When the RBA made its first virus-related "emergency" rate cut of -25 basis points to 0.50%, the prime minister instructed the banks to pass on all of that cut to mortgage rates. The banks meekly complied. But when the RBA later went "all in" cutting to the low boundary 0.25% and introducing QE-like measures -- there was not a whisper out of the government when the banks took the opportunity not to pass on the cut in full, if at all. For by then Morrison needed the banks on side, and for that he needed them to survive.
Now, the banks are part of the "Team Australia" effort, as the analysts at Morgans put it, "to build a sturdy economic bridge to get across the abyss created by Covid-19". Morgans believes this will practically mean is all sorts of exceptions will be applied to all sorts of rules, and "certain parts of the Australian economy will be tried to be put on ice for a period of six months".
In the 1990s, the recession was largely left to play out as any boom-bust cycle should. The RBA continuously cut its cash rate, but started from 14%. Prior excesses were left to be punished without support, and ultimately the economy "was passed from weak hands to strong".
In the GFC, hard nut US capitalists expected the same process to be allowed to play out, but instead the government bailed out large companies and institutions, including the banks, and the Fed introduced QE. It was still not enough to avert what Americans call The Great Recession.
In
This time, with recession inevitable under unique (to anyone alive at least) circumstances, Team Australia is hoping to put the astronauts into suspended animation as the spaceship passes dangerously close to the sun, before emerging singed but safe out the other side. The government, the RBA,
And so are we.
The Pros and Cons
"We view the coordinated response from the Government,
Ostensibly what has happened on the regulator front, aside from government and RBA fiscal and monetary support, is
Solid bank capital positions heading into this crisis, as opposed to 1990 and 2008, are a major positive.
This has allowed the banks, with the support of other Team Australia members, to offer six month mortgage repayment holidays for both households and businesses. Interest will nonetheless continue to accrue and be tacked on to the end of the loan.
Morgans suspects the regulators will grant exceptions to the banks for an interim period such that hardship cases are not classified as conventional delinquencies, such cases do not result in material increases in bad debt provisions (tying up capital), and such cases do not result in material increases to "risk weighted assets", for which the banks otherwise have a regulated cap.
A significant negative is the fact the Australian economy was already on a downward slope last year and the RBA had already been cutting its cash rate to ever lower historically low levels heading into the crisis. Rate cuts started in 1990 from 14%, in 2008 from 7.25%, and in 2020 from 0.75%.
But the central bank has now moved to "unconventional measures", which by any other name implies in practice the unencumbered printing of money. The currency is not at any greater risk than the virus impact on the Australian (and Chinese) economies might imply, because to put it bluntly, everyone's doing it. Particularly the Fed.
And it's difficult to see inflation being a risk anytime soon.
How Long is a Piece of String?
The GFC provided us with the eventually hackneyed expressions of "don't try and catch a falling knife," in reference to a plunging stock market, "kicking the can down the road," in reference to government bailouts and monetary stimulus, and "pushing on a piece of string," in reference to any supporting action being able to avert recession.
This time around we might invoke the old question "how long is a piece of string?" for no one can be certain just how long the virus crisis might last. Peak-virus and a flattening of the curve in
From the outset the accepted, but not ensured, time frame has been six months. A lot hinges on whether this time frame can be held to.
The bottom line is the longer the country remains in lockdown, the greater the number of unemployed workers, bad debts and bankruptcies. This is, or at least was, the swing factor in bank analysts determinations of the potential of, and the extent of, bank dividend cuts, bearing in mind the banks were likely to cut, analysts assumed, even before the virus emerged.
Analysts had gone to a lot of effort to produce base case and bear case scenarios the two largely split on the possible longevity of the crisis using assumptions about peak unemployment levels and the impact on mortgage defaults, and peak business stress and the impact on loan defaults. These scenarios had informed dividend assumptions, and the consensus conclusion was that elevated dividend payout ratios would have to be reined in, amounting to dividend cuts.
But now it's a different situation. "We believe it is sensible for banks to preserve capital in the current environment," Macquarie analysts said in a note this morning, "but we expected the banks to make that decision".
Thus Macquarie believes they are likely choose suspension, with a caveat that dividends can be reinstated (and possibly even special dividends paid) once things return to normal.
Here we have to distinguish between "suspend" and "defer". Outside of the banking sector, many an Australian listed company has moved to suspend dividends due to uncertainty. These are effectively lost dividends, although some give-back might follow down the track. Other companies, and the number is fewer, have decided to defer payment of their dividend to a later date, assuming things actually do go back to normal at some point.
Morgans suggests that the response from bank boards may be to pay a dividend on a materially reduced payout, or defer any decision about a dividend to a later date, but neither are the broker's new base case. That assumes all the banks due to declare a dividend this or next month suspend their dividends, and that
(Morgans does not cover
In the wake of
Morgan Stanley is in the same camp, making note that Australian retail shareholders own almost 50% of bank shares and thus suspension of dividends would be another source of pressure on household incomes. Rather than deferring dividends, the banks will likely make larger reductions than the -30%-plus to 2020-21 dividends the broker had forecast before the
Note that every DRP offer taken up by an existing shareholder results in the creation of new capital.
Is there any good news?
Yes.
Ahead of any dividend decision, the majors were holding capital in excess of minimum regulatory requirements. Were they to have pushed forward with their own dividend decisions, perhaps making cuts but not material cuts, the risk is that an extended virus crisis would inevitably result in the need to raise new capital, diluting shareholder dividends per share.
A move to suspend, defer or materially cut dividends would mean new raisings would not be necessary, in broker views.
That said, Fitch is the first rating agency to downgrade its Australian credit bank ratings, to A+ from AA-, which will result in a greater cost of wholesale funding for the banks, and more so if Moody's and/or
But
Every cloud, eh? They'll be stuck having to drink the domestic stuff.
Note: Typically in bank feature stories, FNArena publishes a table reflecting consensus broker ratings, targets and forecasts, including dividend growth and yield numbers. Given heightened uncertainty, rapidly shifting day to day developments, and the fact that not all FNArena database brokers have yet updated based on the
Notwithstanding any fresh developments in the meantime, the next table will be published post the upcoming May bank reporting season.
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