Bank dividends to bounce back after ‘very grim’ year

Bank shareholders are set to pocket higher dividends in the year ahead as lower bad debt charges boost profits and boards are no longer constrained by a regulatory cap on payouts to investors.

The big four banks’ highly prized dividends were slashed last year, as the Australian Prudential Regulation Authority (APRA) forced lenders to limit payouts to no more than 50 per cent of profits amid fears of spiralling unemployment, tumbling house prices, and a surge in soured loans.

Bank dividends are expected to rebound in 2021 after a regulatory cap on payouts was removed.
Bank dividends are expected to rebound in 2021 after a regulatory cap on payouts was removed.Credit:Karl Hilzinger

Although the economic outlook remains uncertain and boards are tipped to remain conservative, the worst-case scenarios bankers feared have not eventuated and the market now expects a significant recovery in dividends, albeit not to their pre-pandemic levels.

APRA removed its dividend cap at the start of this year, as most borrowers granted emergency deferrals on their loans have resumed repayments.

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Peter Gardner, a senior portfolio manager at $1.8 billion fund Plato Investment Management, said banks’ dividend payout ratios would recover significantly, though distributions would remain below pre-COVID levels. “We certainly expect that bank payout ratios will go from 50 per cent where they have been, to around 70 per cent to 75 per cent,” Dr Gardner said.

Banks set aside billions for bad loans last year, and analysts say over the longer term boards could also announce “write backs” of these provisions, which would further boost profits. However, Dr Gardner said that was unlikely until vaccines had been rolled out widely and the risk of further outbreaks was contained.

Chief investment officer at Atlas Funds Management, Hugh Dive, said the fund had recently increased its weighting to banks, after the “doom and gloom disaster” that was expected in 2020 did not come to pass.

“Last year was a very grim year for bank shareholders,” Mr Dive said. “Looking into 2021, there’s a fair bit of optimism.”

“It’s a bit too soon to see buy-backs, but I think what we will see is some surprising upside in the dividends, particularly if the bad debts are looking a lot more benign than expected.”

The market’s optimism has sparked a sharp rally in bank shares over summer, with industry giant CBA up 23 per cent since that start of November, compared with a 13.7 per cent rise in the ASX 200 over the same period.

CBA’s half-year results, on February 10, are shaping up as a critical gauge of how lenders’ loan books are performing against the uncertain backdrop, and boards’ willingness to return excess capital to shareholders.

Even so, fund managers and analysts cautioned that payouts would not quickly return pre-COVID levels, given the possibility of further lock-downs, diminishing government stimulus payments, and uncertainty about the rollout of vaccines.

Evans and Partners analyst Matthew Wilson forecast the major banks’ dividends would increase by an average of 75 per cent compared with 2020, due to lower bad debt charges and the removal of APRA’s cap on payouts.

Mr Wilson said it was likely that as stimulus was wound back this year, banks would need to remain prudent in their bad debt charges given the backlog in both corporate and personal insolvencies. But the likely hit to bank profits would be nowhere near as severe as feared by markets last year.

“We expect a limited bad debt provision build this year… indeed, write backs may even be possible,” Mr Wilson said.

Angus Gluskie, managing director of $900 million fund White Funds Management, also said he thought banks would feel pressure from investors to increase their dividends. But he added it would not be a rapid bounce-back, as lenders would need to remain prudent as the government’s JobKeeper scheme was withdrawn from March, potentially leading to stress among household and business borrowers.

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Source: Thanks smh.com