Are NAB and Westpac shares still among the best in banks post the axe around dividends?

Summary

• Dividends are being lowered or deferred as less money is being made because of companies preserving cash to ride out coronavirus.
• Westpac scrapped its interim dividend becoming the first major Australian bank to cancel the shareholder payout as its core capital level fell by 1 bps to 10.8% because of elevated capital allocations to riskier exposures.
• NAB reduced its interim dividend by 64% to 30 cents per share (cps) for 1H20 report released in April.
• Further, NAB generated $1.5 billion of unaudited statutory net profit and $1.55 billion of unaudited cash earnings for Q3 for the period ended 30 June.

A dividend is a percentage of profits and retained earnings that a firm pays to its stakeholders. If an organisation generates profit and amass retained earnings, the funds are either reinvested in the Company or distributed as a payout to shareholders.

Australia is considered to be one of the highest yielding markets in the world, but the dividend cuts may result in losing some of its competitive edge. The changes would also be deeply felt locally by the population that enjoys one of the largest equity ownership rates in the world and with a heavily biased $3 trillion pension system towards equities.

Australia made the greatest dividend reductions worldwide in 2020, with more than $6 billion delayed or cancelled as corporations preserve cash to battle the economic fallout triggered by coronavirus, making foreign investors wary of the usually high-yielding corporations in the country.

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Lately, banks have been struggling with record-low interest rates, higher default risk and loan holidays for borrowers grappling with the difficult time, as the nation experiences its first recession in almost three decades. For many investors dependent on bank dividends for their retirement funds, there is an extreme demand to preserve payout.

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Let’s apprise ourselves with the latest news coming from 2 ASX banking stocks.

Westpac Banking Corporation (ASX: WBC)

Westpac share price fell by 2.331% from its last close to $17.18, on 18 August.

On 18 August 2020, Westpac Banking released three months report for the period ended 30 June 2020.

Key pointers for 3Q20 are as following:

• Unaudited statutory earnings stood at $1.12 billion while unaudited cash earnings were at $1.32 billion compared to 1H20 quarterly average of $0.5 billion;
• Credit impairment charges stood at $826 million, while net interest margin was down by 2.05%, 8bps below the average of 1H20 due to low-interest rates and higher liquids;
• Common equity tier 1 capital ratio shrunk by 1 bps to 10.8% due to higher capital allocations to riskier exposures;
• Total provisions rose $574 million to cover for bad debts, increasing total provisions to credit RWA (risk weighted assets) to 170 bps, increasing by 13 basis points; and
• About 78k mortgages, i.e. worth $30 billion are in deferrals at 31 July, down from 135,000 ($51bn) relief packages provided.

Source: Westpac 3Q20 update, dated 18 August 2020

Also, Westpac Board decided not to pay dividend for the first half of 2020, becoming the first Australian bank to officially cancel shareholder payout amid COVID-19. Many analysts have noted that shrinking capital levels of WBC might result in cancellation of its final payout as well.

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Peter King, Westpac CEO stated that the impact of COVID-19 pandemic is evident as margins dropped and activity fell, but Westpac continues to be well placed to support its customers. Though the economy has been faring well, there is substantial uncertainty given the unpredictability of the coronavirus outbreak and their local impact.

National Australia Bank Limited (ASX:NAB)

NAB share price fell 0.789% to $17.61 on 18 August 2020.

Recently, on 14 August, NAB announced its Q3 FY20 results ended 30 June 2020 to investors, which were reflective of coronavirus caused discomforts. The unaudited statutory net profit for Q3 2020 stood at $1.50 billion, and cash earnings growth was down 7% on the prior corresponding period, totalling $1.55 billion. However, cash earnings rose by 24%, and cash earnings before credit impairment charges increased 17% when compared to the first half of 2020 quarterly average.

Other key metrics from the third quarter results are:

• NAB’s revenue grew by 10% due to higher markets and income of Treasury including reversal of unrealised investment losses;
• Net Interest margin remained steady while NAB’s expenses increased by 2% in the quarter, with higher annual leave accruals and remuneration;
• Credit impairment charges of $570 million were recognised while NAB ratio of loans overdue by more than 90 days rose to 1.06%, up from 0.97% in Q2; and
• NAB CET1 capital ratio is of 11.6%.

Source: NAB Q3 trading update, dated 14 August 2020

NAB did not mention about dividend in its latest Q3 results, but the related announcement is likely to come in November when full-year results are released. NAB had cut its interim dividend by 64% to 30 cents per share in its half-year results during April, when its net profit was down by 51%.

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NAB stated that its Q3 report demonstrated the uncertainty surrounding the present situation exemplified by unpredictable markets and muted credit demand.

Ross McEwan, NAB CEO, stated that coronavirus has posed significant challenges to customers and the bank. Repayment deferrals, as well as government relief, are providing substantial help to its customers. He also added that a clear strategy has been prepared for NAB including new operating model and creating clear accountabilities.