Income Report / Income Note: APRA’s impact on Bank Dividends (CBA, NAB)

By Market Matters 29 July 20

Income Note: APRA’s impact on Bank Dividends (CBA, NAB)

Market Matters Income Report 29th July 2020

A volatile morning for local stocks with the market shrugging off weakness overseas to open on the front foot, the banks driving gains as APRA put out some guidelines around bank dividends moving forward, the short of it being that it actually implies upside v current expectations on dividends from ANZ & WBC, downside in terms of CBA, and about in line with market assumptions on NAB. We outline some numbers around this below in a short & sharp income note today.

As mentioned, banks are offsetting some weakness elsewhere, especially the resource stocks that are giving back some of yesterday’s outperformance, Nickel / Gold miner Independence Group (IGO) the weakest link after a poor set of June Quarter production numbers. RIO reports 1H20 numbers this afternoon following market close – we’ll cover in the PM note.

QLD has announced border closures effective Saturday for Sydney siders, no entry into the sunshine state even though our new cases today were just 19 compared to Victoria at 295, which is an improvement on last week’s average.

A reminder there’s an MM webinar on this afternoon, we’re almost maxed out in terms of numbers however a few spots remain for those keen on hearing more about the retail sector. I’m chatting with Danny Younis, he’s one of our analysts at Shaw, he’s good, one of the guys I rate in terms of his views and he never does media / external engagements, he tells me he’s making a big exception under duress! CLICK HERE

The ASX 200 is currently trading down -8pts/-0.14% to 6011.

ASX 200 Chart

The Income Portfolio had a soft week falling by -1.29%. No dividends were paid during the week so performance was carried by weakness in IVE Group (IGL -5.88%), Perpetual (PPT -4.2%) as they raised capital to make an intelligent acquisition. We are positive on the stock at the raise price. The portfolio is up +1.70% FY21 to date with the benchmark (RBA + 4%) sitting at 0.31%. Since inception the portfolio has added +9.78% vs. the benchmark of +15.83%. 

Income Note: APRA’s impact on Bank Dividends

Source: AFR

This morning APRA have communicated with the banks about curtailing dividends in light of many challenges facing the economy and as a consequence, bank earnings. The banks have rallied on the news supporting the broader market. Below we briefly outline what the update means for bank dividends based on current market expectations.  

What was said from APRA?

APRA Chair Wayne Byres outlined the regulator's expectations in three bullet points saying bank boards should "seek to retain at least half of their earnings when making decisions on capital distributions," "conduct regular stress testing" and "make use of capital buffers to absorb the impact of stress."

“Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by COVID-19," Mr Byres said.

“In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from COVID-19, and restrictions on dividends from their New Zealand operations."

"APRA has therefore set an expectation that dividend payout ratios for ADIs will be maintained below 50 per cent for this year.”

Before todays update, this is where Morgan Stanley saw payout ratios for the big 4 – interesting to look at their FY22 assumptions which is where things normalise with payouts nearer 60% than the 70% odd in years gone by.

What this means for bank dividends?

APRA announced this morning that banks can pay up to half of their earnings in dividends and use dividend reinvestment plans to partially offset the impact of these.   

Consensus earnings per share (EPS) for the banks are as follows:

ANZ Bank (ANZ): 130 cps

Commonwealth Bank (CBA): 488 cps

National Bank (NAB): 117 cps

Westpac (WBC): 107 cps

If all the banks reported dividends at 50% of statutory EPS then the FY20 dividends & yields would be around:

ANZ Bank (ANZ): 65 cps / 3.5%

Commonwealth Bank (CBA):244 cps / 3.4%

National Bank (NAB): 58.5 cps 3.2%

Westpac (WBC): 53.5 cps / 3%

In FY20 to date, ANZ and WBC deferred their dividend, while CBA has paid $2.00 and NAB 30cps. This suggests that the ANZ and WBC dividends may end up being higher than current forecasts and the CBA dividend may be lower, while NAB would be in line with current forecasts.

MM remains bullish on the banks with current holdings in CBA & NAB

 

Commonwealth Bank (CBA) Chart

National Bank (NAB) Chart

Conclusion (s)

MM remains bullish the banks from current levels for income, despite the weakness in dividend numbers this year.

Have a great day!

James, Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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