Shareholders in the big-four banks look set to pocket higher dividends this year, as lenders enjoy a resurgence in profits thanks to the economy’s rapid rebound.
Bank shares are traditional favourites with “mum and dad” retail investors, particularly retirees, who often rely on the income to fund their standard of living after they stop work.
However, last year, they were provided with a stark reminder of the inherent riskiness of dividends funding their retirement when the big banks slashed payouts, in some cases to zero, as they braced for a wave of bad debts. That has not eventuated and banks are now in an earnings sweet spot, sparking predictions of higher dividends and likely share buybacks.
Commonwealth Bank is tipped to lead the charge, with Morgan Stanley analysts led by Richard Wiles forecasting its dividends for the current financial year would rise to $3.40 per share, up from $2.98 last financial year. They forecast further growth to $4 next year and $4.25 the year after that.
At Westpac, the analysts forecast dividends rising to $1.18 a share this financial year, and $1.25 next financial year, while at NAB they expect $1.20 this year and $1.30 next year. For ANZ, they expect $1.40 a share in dividends for this year and next, up from 60c last year.
On top of this, the big four are sitting on billions of dollars in excess capital. Morgan Stanley forecasts well over $20 billion will ultimately find its way back to shareholders through share buybacks in coming years.
Lenders are required to hold capital equal to 10.5 per cent of their risk-weighted assets, but the latest results showed the big four were miles ahead of this benchmark. CBA’s capital ratio was 12.7 per cent, NAB’s and ANZ’s was 12.4 per cent, and Westpac’s was 12.3 per cent.
Hugh Dive, chief investment officer at Atlas Funds Management, says he believes there is still “a bit of a way to go” in the banks’ dividend recovery, as the lenders’ profits benefit from falling bad debt costs. “They are quite well capitalised, so there’s no need to hold back,” Dive says.
One caveat is that bank boards remain cautious about the risk of further coronavirus-induced lockdowns, and they have kept dividend payout ratios fairly modest.
However, Morningstar analyst Nathan Zaia, who describes the outlook for bank dividends as “very good,” says he does not think it would be necessary to continue keeping payout ratios so low.
As well as falling bad-debt costs, bank profits are also benefiting from cheap funding costs because of record-low official interest rates, as well as stronger credit growth thanks to the housing boom.
So, after years of underperformance, bank share prices have enjoyed a dramatic rally from their lows of last year.
CBA shares are up more than 70 per cent from their low point of 2020 to more than $98, while ANZ is up by almost 80 per cent. Westpac and NAB have increased by about 70 per cent.
Given the surge, some investors are sceptical about how much of the good news has already been “priced in” to the value of the shares.
Citi’s banking analyst Brendan Sproules, for example, has moved away from a “buy the sector” rating, predicting that banks would now have to deliver a recovery in revenue growth to drive their valuations higher.
Even so, Sproules still think the banks would remain relatively attractive to investors as the global economic recovery takes shape and more in the financial markets start to talk about interest rates and bond yields rising.
Source: Thanks smh.com