That view was backed up by more than three decades of history. Now, however, it is clear that it does not take a full-blown crisis for dividend payments to be slashed.
Three of the big-four banks have now cut their dividend in the past four years, a period in which bank profits have slowed, but there has not been a recession or substantial rise in bad debts.
Lower payout ratios
ANZ, which cut its dividend in 2016, also last month lowered its rate of franking credits from 100 per cent to 70 per cent – its first partially franked dividend since 1999.
National Australia Bank lowered its dividend in May of this year – and again last week – while Westpac joined the growing trend by slashing its final dividend by 15 per cent to 80c a share last week and adopting a lower dividend-payout ratio.
A trial question for investors is: what are the chances of the banks cutting dividends again?
None of the banks gave specific guidance on this, and the assumption of many in the market is that boards would be reluctant to cut their payments again, unless they really have to.
Even so, some sceptical analysts believe shareholders are not yet out of the woods, given the challenges facing the big banks’ bottom lines.
One analyst who has been predicting dividend cuts from banks, Evans and Partners’ Matthew Wilson, believes Commonwealth Bank still needs to cut its dividend, and Westpac would need to trim its payouts further.
Wilson says Westpac’s 15 per cent cut in the dividend is “not enough,” when taking into account the squeeze on its profit margins, lower fees and higher costs of bad debts. He is tipping a further 6 per cent cut next year.
He is tipping CBA’s annual dividend payment will fall to $3.70 a share in 2020, down from $4.31.
The other two banks should be able to keep their dividends flat, provided there isn’t a major worsening in the economic backdrop, Wilson says.
Others point out that NAB may have less margin for error if there is an unexpected problem, such as weaker revenue, or the need to take higher provisions for bad debts or action by regulators.
UBS analyst Jonathan Mott says that if this occurs, “dividend sustainability will be called into question.”
Aside from the dividend cuts, what was striking about this year’s annual results from the big-four banks was that nearly all the trial numbers were heading in the wrong direction.
Loan books are barely growing, with some even shrinking. The margin banks make between lending and deposit rates is the slimmest on record. The glory days of banks enjoying return on equity (ROE) above 15 per cent appear to be in the past.
Yet Wilson says the banks appear “stuck in the mindset” of paying out 70 to 80 per cent of profits, which made more sense when they were making much higher ROE. In the current environment, he says dividend payout ratios of closer to 60 per cent “make much more sense.”
Some are more upbeat and maintain banks can grind out higher earnings by cutting costs.
However, it would be a bold call to assume dividends could not be cut again.
Clancy Yeates is a business reporter.