The dividends of Australia’s big four banks lately seem to be in the danger zone as they have been under pressure with overall cash profit from the big four banks dropping 3% to $14.8 billion in H1FY16 (KPMG report). Even share prices of these banks have been said to decline by 11% to 25% over the last one year. The fall in profit in H1FY16 is one of the indicators for full year profit to likely be impacted to some extent. Moreover, the National Australian Bank (NAB), Westpac Banking Corporation (WBC) and Commonwealth Bank of Australia (CBA) have kept their dividend steady during the first half 2016 but Australia and New Zealand Banking group (ANZ) had cut its dividend by 7% from 86 cents to 80 cents, and that gave a signal to the investors for likely cuts in dividends by other three banks going forward, with their final result announcement. Currently, Westpac Banking Corp (ASX: WBC) has an annual dividend yield of about 6.2% while National Australia Bank has about 7.2% dividend yield. Commonwealth Bank of Australia has about 5.7% dividend yield while Australia and New Zealand Banking group has about 6.5% dividend yield (as of August 24, 2016). The recent full year financial results for CBA however indicated that the bank has maintained a total dividend for the year to $4.20, flat over the prior year with the final dividend of $2.22 per share. This came at the back of the financial performance by the bank.
CBA’s full year dividend history (Source: Company Reports)
Nonetheless, difficult economic and market conditions combined with tougher regulations continue to be headwinds for these major banks. Moreover, rising loan losses and weaker demand for credit are some of the factors that could impact the future earnings of the banks, consequently impacting dividend payments. Furthermore, the corporate bad debts had affected the performance. Even though the mortgage debt had not deteriorated, it still raises some concerns over a possible pressure. The loan impairment charges are expected to weigh on earning results in coming years. Furthermore, lower interest rate also continues to drive competition within the sector.
On the other side, Australia’s household debt to income ratio jumped from 167% in 2011 to 186% in 2015 (as per HSBC report). Australian banks heavily invested in inflated real estate markets in the world. The big four banks had issued more than 80% of the countries residential property mortgage. The fall in housing prices also seems to impact the banks’ market performance. Moody’s investor services have also warned about the resurgence in house prices and debt. Furthermore, one of the major factors contributing to the lack of dividend growth is the additional requirement for the banks to hold more capital against the loans they write. This was the reason why banks raised additional capital in the year 2015.
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