Australian banks set to confess sins and cut dividends?
Investor will be eager to see how the big banks have fared since the Royal Commission’s findings were handed down.
They say confession is good for the soul and there is going to be plenty of it over the next couple of weeks as three of Australia’s big banks outline their latest 2019 half year results.
ANZ (1 May), National Australia Bank (2 May) and Westpac (6 May) will all have investors poring over their half year numbers and there will be plenty to look out for.
Following the Royal Commission, one of the biggest confessions will be the size of the continuing bill to compensate current and former banking and financial planning customers for some of the worst sins unveiled during evidence.
Which banks are moving fastest to compensate customers?
Investors really want to see that the banks have got their arms around this problem and are moving fast to get a handle on the scale of the issue and the total cost.
That hasn’t been easy to do given the large number of customers involved, the divestment of wealth units and the complexity of some of the issues but the most successful of the big banks will be the ones that are the fastest and most efficient at repenting and repaying their prior sins.
Billions have already been put aside for compensation and remediation and billions more will be needed, but investors want to be able to see some light at the end of the tunnel.
Dividends under pressure in both directions
Another number that will loom large is the size of the bank dividends, which are coming under pressure from a couple of directions.
Due to the Labor plan to reduce the refundability of dividend franking credits for some retired investors, the banks are under pressure to distribute as much of their franking credits as they can before the changes come in.
At the same time, the banks are also under financial pressure from the remediation measures, the credit crunch, pressure on interest margins, increased competition and the need to retain a strong capital base.
Raising extra capital will be hard
The capital position is probably now the most threatening of these issues, with the bank’s New Zealand operations all facing the need to provide much higher capital adequacy due to tougher requirements by New Zealand’s central bank.
Some estimates have been as high as $8.1 billion for the amount of extra capital required and there are not too many easy options in how to raise that amount of capital.
There is a limit to how much can be exported from the bank’s Australian reserves and it will seem odd if investors are asked to contribute too much extra capital for their New Zealand banks at the same time as big dividends are also being paid out.
Lower dividend could be one answer
Of course, one or more of the banks could answer this issue by reducing their dividends with NAB under new interim chief executive officer Phil Chronican seen as the most likely to bite the bullet and make a cut.
It is a really tough decision because many investors buy banks specifically because of their traditionally lush dividends but these could be tougher times in which their expectations are dashed – along with, potentially, the bank share prices.
Which banks are moving fastest to cut costs?
Finally, the other number that investors will be keeping an eagle eye on will be which of the banks is being the most successful at cutting costs to preserve profits and stay ahead of weakening revenue growth.
This has become the main game for the banks in remaining relevant to investors by keeping their profits strong even in a tougher environment in which home loan and consumer credit growth is hard to find.
The banks that are seen to be keeping profits strong by reining in costs and getting ahead of the Royal Commission inspired remediation plans will be the winners in this new environment.
Falling behind is not an option in a competitive environment so the bank reporting season will be vital in establishing which banks will be the winners.