- Banking space has been under the spotlight amidst changed dividend scenario in the wake of COVID-19 crisis.
- Banks have been deferring or slashing dividends to maintain balance sheet positioning.
- Risks of credit losses and loan extension/deferral scheme cast a heavy blow to the banks’ financial footing.
- Royal Commission into Misconduct in the banking has been a major factor that marked the beginning of the potential decline of dividend scenario for the banks.
- While income investors may be reluctant, value investors with a long-term focus may look at bank shares trading at multi-year low levels.
- As Australia enters cashless age, a multi-billion-dollar opportunity can unfold for financial players willing to invest in new digital models.
Banking space, once considered an attractive avenue for income winners, has been under the scanner amidst COVID-induced dividend cut/deferment scenario. Big four banks have been seen to be reeling under the risks of credit losses and loan deferrals.
According to the S&P Global, earnings of banks fell sharply during 1H20 with an uptick in credit provision charges.
Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corporation (ASX:WBC) are two solid Australian banks listed on the ASX. They were once considered as potentially attractive dividend stocks. However, their current business valuation and dividend scenario seem to be reflecting a different picture for the industry.
Royal Commission into Misconduct in the banking has been a major factor that marked the beginning of the potential decline of dividend scenario for the banks. Besides, loan extension/deferral scheme amidst grave financial crunch of the households and businesses further aggravated the banks’ turmoil during the pandemic.
While no one could have predicted the current health crisis, many understood that the findings and recommendation results from the Royal Commission could potentially impact the banking dividends. This was partly due to the fact that the major banks began their remuneration process, costing millions. In some cases, the big fours sold various divisions of their companies, such as the Commonwealth Bank which sold CommInsure Life to AIA Group.
In May 2020, Westpac’s Board made the decision to not pay the 1H20 dividends. This was intended to keep the bank’s balance sheet strong. The bank aims to consider dividends while finalising its FY20 results.
On the other hand, the Commonwealth Bank announced to pay a final dividend of A$0.98 per share (100% franked) with the company tax rate of 30%, for the second half of the financial year ended 30 June 2020. FY20 dividend of A$2.98 marked a A$1.33 decline from FY19 payouts.
National Australia Bank (ASX:NAB) and Australia and New Zealand Banking Group (ASX:ANZ) also did not fare any better in the same landscape.
The NAB interim dividends for 2020 came to be 30 cents per ordinary share, franked to 100% at the company tax rate of 30%, payable on 3 July 2020. This dividend payout was quite low in comparison to the last two payouts at the bank.
While ANZ plans to pay a dividend on 30 September 2020, this decision was originally deferred earlier in the year pending the Board’s decision. The final proposal is to pay a 2020 interim dividend of 25 cents per ordinary share (fully franked at 100% for Australian tax purposes).
Emerging Trends in Banking Space
Experts opine that banks have set aside billions of dollars in provisions for potential losses. While income investors may be reluctant, value investors with a long-term focus may look at bank shares trading at multi-year low levels. A prudent approach to fundamental analysis is the key to tapping lucrative players with a sound balance sheet and financial footing. Besides, timing is also another important consideration before talking an exposure.
While there may be some pain over the near term for banking stocks, investors, while engaged in portfolio rebalancing and restructuring, can tap undervalued banking stocks depending on their risk appetite, investment horizon and return expectations.
Market players need to be cautious of not overlooking the risk of further loan defaults following termination of the moratorium on loan repayments and government subsidies.
Stocks of big four banks are still trading below their pre-pandemic levels. However, they have marked a decent improvement since the March 2020 crash. Post bottoming out on 23 March, Westpac has soared by 23%. While, Commonwealth Bank share price has marked an uptick of 27%.
As Australia enters cashless age, a multi-billion-dollar opportunity can unfold for financial players willing to invest in new business models and technologies based on impending digital landscape.
A classic example to be seen is Commonwealth Bank’s digital application, which delivered a benefit of about $153 billion to customers in the past financial year.
National Australia Bank is also accelerating its digital transformation, as evident from the recent signing of a new five-year strategic partnership with Microsoft to invest, co-design and develop NAB and Bank of New Zealand’s multi-cloud technology.
Kate is an experienced Journalist with a demonstrated history of working in the financial services industry. She also has a strong media and communication skills with a bachelor's degree in Journalism from The University of Queensland.