What do the CET ratios of Australia’s big 4 banks tell us about prospective dividend payouts?

Dividends are one of the key variables that an investor checks while investing – that is, if they don’t place the bet on growth stocks.

There are multiple factors that determine the size of the dividend payout made by a company – from profitability to regulatory guidelines.

But one of the major determinants of dividend payouts – at least for banks – is common equity tier I (CET-I) ratio. The CET1 ratio compares a bank's capital against its risk-weighted assets to determine its ability to withstand financial distress. The core capital of a bank includes equity capital and disclosed reserves such as retained earnings. In short, it is the measure of solvency of a bank.

That said, dividend is not the only way to return the wealth created by a company to its shareholders. There are various ways to do so – from bonus issues to share buybacks.

Earlier this week, one of the biggest banks in Australia – Australia and New Zealand Banking Group Ltd (ASX:ANZ) – announced a buyback worth AU$1.5 billion. ANZ shares have rallied by over 2% since then, despite mixed sentiments in the broader market.

ANZ isn’t alone in returning wealth back to its shareholders. The Australian banks are known for their generous dividend payouts in history. Except for the pandemic year of 2020 – when dividend payouts were severely truncated – the big 4 banks have been known for their dividends.

Going forth, as the world expects the pandemic’s severity to taper off due to increased vaccination, eyes would be on the big 4 and their dividend payouts. In a bid to determine which bank would be the best one in terms of dividend payments, let us take a look at profitability and solvency of these banks.

  1. Commonwealth Bank of Australia (ASX:CBA): The CET-I ratio of the bank, at the beginning of 2021, stood at 12.6%. The total capital adequacy of the bank, on the other hand, comes in at 18.9%. For the half year ended on the December 2020, the bank’s net profit stood at AU$4.9 billion – 41% of its topline.
  2. Westpac Banking Corp (ASX:WBC): The bank reported a net profit of AU$3.45 billion for the half year ended March 2021. This means that profitability of the bank stood at 32%. The bank’s CET-I ratio was at 12.34%, while the capital adequacy ratio of the bank stood at 18.43%.
  3. National Australia Bank (ASX:NAB): The bank has reported AU$3.21 billion as its bottomline – 38.24% of its topline. The CET-I ratio of the bank stood at 12.37% during the quarter.
  4. Australia and New Zealand Banking Group Ltd (ASX:ANZ): In half year ended March 2021, the bank mopped up AU$2.9 billion in bottomline – 35.2% of its topline. Meanwhile, the CET-I ratio of the bank stood 12.5%.

Which bank holds the numero uno spot?

The Commonwealth Bank of Australia is the most valued company and the largest bank in Australia. In terms of profitability, as well as solvency, the bank is far ahead of its peers. So, in all likelihood, the best returns to shareholders will come from them.

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