The COVID-19 crisis has seen banks slash dividends, two of Australia’s big banks deferring dividends indefinitely. There is looming uncertainty as to whether banks will pay a dividend in the next six months. With second waves spreading across Australia, home and business loans being deferred and government stimulus being extended, why would an investor look to the banks for income?
According to Michael Maughan, portfolio manager at Nikko AM, the short term outlook for banks is uncertain. However, when assessing the long-term outlook, he is certain that the banking sector will recover, and will begin to pay dividends again. In this short video, Michael discusses what dividends will look like when they return, and shares his views on which banks he believes are in the strongest position going into reporting season.
In the short term, you can't hide from the fact that two of the four big banks didn't pay dividends in May, and so there's no doubt that there is risk. Looking forward, we're looking at a 60/40 chance that dividends are paid in the next six months by the banks. If we think about it, it's not really an earnings issue. We are confident that we've taken a conservative view about what the bad debt cycle is going to look like. This year for banks is the vagaries of how capital is calculated, and without getting too technical, at the end of the day what you need to see is a peaking in the bad debt provisions. They need line of sight on what the future holds and how many people are going to go through financial stress.
Now with job keeper and loan repayment holidays, the line of sight on that is just pushed out. Your ability to have a strong view, that you have made the bulk of the provisions you need to, is going to be difficult. That's going to make it an interesting position for Boards, in consultation with APRA, to decide whether they're going to be in a position to pay dividends in August and November. In terms of the bank specifically, I think CBA is in a stronger position to be able to pay a dividend, just because it's made some asset sales and has a slightly stronger capital position. ANZ, NAB and Westpac will have the benefit of waiting till November to have to make their decision about dividends. We expect that there's a good chance that they pay, but a smaller dividend than what we're used to.
In the longer term, we think that there is value in the banks. They have very strong capital positions, they've made some adjustments going into this in terms of reducing their exposure to interest only loans, some of it by their own choice and some of them imposed on them, but that puts them in a better position. Recessions aren't traditionally a good place for banks, and we know that we can provide for that in our assumptions in terms of what we think banks are going to go through. We can see longer term value in the banks, because we know that they're in a position to ride this out. However, when you look at the short term risks and the longer term value opportunity, what we've done is to neutralise our position in the banks and, basically buy them, but not be overweight.
Michael and his team invest in 40-70 companies on the S&P/ASX200, with the primary aim of providing tax-effective income alongside the potential for capital growth. For more information, please fill in the contact form below or visit the Nikko AM website.
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