Increasing risk to earnings and provisioning have reduced dividend payouts by banks, with a loss of ~AU$116bn or 31% in market capitalisation to major players, since the beginning of the year, according to a May report by Deloitte.
Moreover, a report released by S&P Global Ratings at the end of April 2020 has forecast that increasing economic risks experienced by Australian banks, owing to coronavirus and containment measures, should be substantial but temporary. The rating agency is of the view that economic risk trend in the present time is negative and there is 1-in-3 possibility of significantly more severe or prolonged economic impact for this sector than its base case. S&P has also projected credit losses to increase to ~ 6 times than those in the last year. Despite lower interest and fee income, the major banks in Australia are expected to be able to absorb the rating agency’s forecast rise in credit losses within their earnings.
Big 4 Players in Australian Banking Sector and Their Dividend Updates
NAB, Westpac, CBA and ANZ are the big four banks in Australia, which have paid consistent dividends to their shareholders over the past few years. Of these banks, three banks (NAB, Westpac and ANZ) have released their half-yearly results, and their latest performance along with few market updates have highlighted the impact of coronavirus on the banking operations. Moreover, these banks have either reduced, deferred, or cancelled their dividend distribution. CBA is the only bank of these 4 big players in the Australian banking industry that has paid interim dividend for the period ended 31 December 2019.
National Australia Bank Limited (ASX:NAB)
During end-April 2020, National Australia Bank Limited (ASX: NAB) rolled out a capital raising program, including AU$3 billion through an institutional placement and approximately AU$500 million via a share purchase plan. The program is part of the Company’s proactive initiatives to build capital to continue supporting its customers, in light of the challenging times due to the COVID-19 pandemic. The bank is also targeting to boost its capital level to continue managing through varied possible scenarios, including a prolonged and severe economic downturn.
1H FY2020 Key Financial Highlights (period ended 31 March 2020):
- Cash earnings for the period stood at AU$1,436 million, down 51.4% as compared to the previous corresponding period.
- Interim dividend reduced by 64% to AU$ 30 cents per share.
On 22 May 2020, NAB closed the day’s trade at AU$15.340, down 1.16% from its previous close.
Westpac Banking Corporation (ASX:WBC)
- Statutory NPAT declined by 62% to AU$1,190 million.
- Cash earnings dropped 70% to AU$993 million.
- Cash earnings stood at 28 cents per share, representing a decline of 71%.
- The Board has decided not to pay an interim dividend in June 2020.
According to Westpac Group CEO, Mr Peter King, this was the most difficult result that the bank recorded in many years, as there were higher impairment charges due to COVID-19 and notable items.
WBC inched downward by 1.055% from its previous close to settle at AU$15.010 on 22 May 2020.
Australia and New Zealand Banking Group Limited (ASX:ANZ)
- Statutory operating income from continuing operations declined by 4% to AU$8,893 million.
- Statutory profit dropped 51% to AU$1,545 million.
- Cash profit during the period was AU$1,323 million, down 62%.
- Cash profit from continuing operations slipped 60% to AU$1,413 million.
- The bank decided to cancel the interim dividend payment until clarity regarding the economic outlook.
On 22 May 2020, ANZ closed the day’s trade at AU$15.230, down 1.04% from its previous close.
Commonwealth Bank of Australia (ASX: CBA)
On 13 May 2020, Commonwealth Bank of Australia (ASX: CBA) released its Q3 FY2020 results for the period ended 31 March 2020.
- Unaudited statutory cash NPAT stood at ~AU$1.3 billion during the quarter, impacted by customer remediation (AU$135 million) and COVID-19 provision (AU$1.5 billion).
- Operating income remained flat, and operating expenses, excluding notable items, declined 1%.
- Interim dividend of AU$3.5 billion was paid on 31 March 2020 for the first half ended 31 December 2019.
Recently, CBA announced to have reached an accord with global investment firm KKR to sell a 55% stake in Colonial First State. The total valuation of Colonial First State is AU$3.3 billion, and by selling its interest in Colonial First State, CBA would receive cash proceeds of ~$1.7 billion from KKR. As per CBA, the transaction is in line with its strategy to keep the business focus on its core banking operations.
CBA has also received the final regulatory approval to divest its 80% equity interest in its Indonesian life insurance business, PT Commonwealth Life or PTCL, with the transaction completion expected to result in a pro forma uplift to the bank’s CET1 (Level 2) capital ratio of 7 basis points (as per its risk weighted assets as at 31 December 2019).
On 23 May 2020, CAB closed the day’s trade at AU$58.700, down 0.593% from its previous close.
Are Players Like Telstra Emerging as Winner?
Investors are generally not happy with reductions or deferral of dividends, as for few, dividends are the income streams. Does this mean there are opportunities for other players?
Let us discuss Telstra Corporation Limited (ASX:TLS), part of the communication sector, which for interim dividend, announced a distribution of AU$ 951 million to shareholders. The Company also recently priced approximately AU$860 million bond issue.
In its COVID-19 market update during mid-April 2020, the Company announced several initiatives including
- Putting on hold any further job reductions over the next six months
- Making thousands of temporary recruitments
- Introducing a new global epidemic and pandemic leave policy
- Unlimited data for home and small business broadband customers
- Extra data for consumer and small business mobile customers
Telstra Corporation Limited also gave two market updates on 13 May 2020.
- 5G Expansion to Cover More Suburbs in Tasmania
TLS’ 5G rollout covers more than 600 suburbs across the nation, and these regions now have access to over 50% 5G coverage. There are 44 suburban regions with over 50% covered by the new mobile technology across Hobart and Launceston.
Telstra’s Regional Manager, Michael Patterson stated that the year 2020 would be the year of 5G and the aim of the Company would be on the expansion of 5G coverage in order to make the technology available to more zones across the above-mentioned regions. There is also more choice in handsets and devices being made available to customers as well as applications making use of the 5G benefits.
- 5G Coverage Expansion into More of Melbourne
In Melbourne, the Company covers more than 50% of areas in 57 suburban regions with the new mobile technology. Moreover, some places in Melbourne have access to 5G throughout the whole suburbs. Loretta Willaton, Telstra’s Regional General Manager, stated that the focus of the Company would be on the expansion of the 5G coverage to more regions across Melbourne and Victoria in 2020.
In 32 major & regional cities, the Company has rolled out 5G coverage to selected regions. By mid-2020, TLS intends to provide 5G into selected regions of 35 cities.
Stock Performance: TLS stock has provided a negative return of 16.83% in the last three months. However, in the past one month, the return was noted at 0.99%. On 22 May 2020, the stock closed at AU$3.06, down 0.971% from the previous close.