AMP Capital’s team has predicted the big four will need to cut their payouts by 50 per cent or more when they report in May, as they navigate the crisis.
The investment manager has previously predicted ASX 200 dividends could be cut by a third or more over the next 12 months, a larger cut to aggregate dividends than what was seen during the global financial crisis.
Dividend cuts have spread globally as country lockdowns have eaten away at company revenues and working capital. Overseas, financial watchdogs in Europe and New Zealand had already cancelled bank and insurer and dividend payments and buybacks as a result of the virus.
While APRA hasn’t mandated Aussie banks abandon their payouts, it has asked them to consider it. Bank of Queensland was the first bank to take the leap, deferring its interim dividend last week.
AMP Capital Australian equities portfolio manager Dermot Ryan commented he expects others will follow BOQ, although they may not entirely reduce their dividends to zero.
“Keeping precious working capital is key across all sectors and prudent as companies move to preserve cash in these lean times,” Mr Ryan said.
“It is only reasonable that dividends are crimped to make sure banks have surplus capital to lend into the economy, particularly as credit spreads widen.”
But with all banks holding “unquestionably strong” capital, he has two questions, the first being how much bad debts in small business, commercial real estate (rent waivers) and mortgage books total after the crisis?
The second, he said: “Does APRA know something the market doesn’t or are they following their offshore peers?”
New accounting standards may mean banks will have to provision in advance of losses, AMP Capital commented, making it harder for bank dividends to rebound as fast as the rest of the market.
SMSF investors in particular could cop drops in portfolio incomes as a result of the decreased dividends, given that they collectively have a high level of investment in domestic banks, Mr Ryan said.
Passive yield targeting ETFs may also be forced to rebalance out of the banks once their dividends and share price have fallen, locking in losses for investors.
But AMP Capital has pointed to other sectors for dependable dividends, now short in supply, including telcos, supermarkets, utilities and rail stocks.
“Our preference and most of our actions in the sell-off have been to buy into quality stocks that are cutting their dividend to zero in the short term as typically this represents an attractive entry point if you can look through the next 12 months,” Mr Ryan said.
“We are discussing but not yet ready to pull the trigger on buying more banks.”
