Can Australia’s big banks regain their crown as the biggest fully franked dividend machine on the Australian share market?
It is the multi-billion dollar question that legions of shareholders would love to know the answer to after a series of barriers to higher dividends began to topple.
It was a disturbing and unwanted development given that bank dividends were seen as a reliable source of income for many investors, particularly self-funded retirees.
Bank dividend payments reached a peak of $23.9 billion in 2019, which represented around 30% of all of the dividends and franking credits on the Australian share market.
Profits looking stronger than expected
The first and most significant barrier was the threat to bank profits posed by the continuing COVID-19 pandemic.
On that measure, there has been a dramatic improvement in the outlook.
It is not that long ago that some of the major banks were themselves predicting that Australian property prices would fall by 20% as the pandemic caused unprecedented economic dislocation.
If that prediction had come true, it would have savaged the bottom line for all of the banks, particularly as it applied to a mountain of housing loans with repayments frozen by the pandemic.
Instead of that gloomy property prediction, prices took a momentary dip before charging out of the blocks as Australia’s response to the pandemic led to a much better and faster return to a “COVID normal’’ economy than expected.
With the Australian Reserve Bank slashing rates to just 0.1% and lockdowns causing Australians to reassess their homes, the pandemic has breathed new life into the property market.
The mountain of frozen home loans seems to be thawing out quite successfully as repayments begin to be made again, home loan growth is being turbocharged by a rash of refinancing and many households are actively shopping around for new digs as the increased use of technology and working from home adds impetus to housing mobility.
Even better for the banks, the Reserve Bank is giving them access to mountains of cheap cash which they are being encouraged to lend out to eager home buyers – making some healthy lending margins on the transaction.
There is plenty more capital to lend as well, with bank customers stashing away cash at a record rate even as deposit rates have shrunk so markedly that you need a magnifying glass to see them.
On top of this, business activity which slumped hard during the pandemic, is coming back strongly in line with improving consumer confidence.
Regulators lending a helping hand
After a scorching and expensive time for the big banks in the aftermath of the Banking Royal Commission, they are now facing a much more positive outlook.
The best example of this was last week’s decision by the banking regulator the Australian Prudential Regulation Authority (APRA) to remove its guidance to banks to limit dividend payments to 50% of profits.
The removal of this hurdle is huge news for dividend hungry shareholders because it effectively hands back control of capital management to bank boards, rather than being hamstrung by the regulator.
All of the banks have emerged at this stage of the pandemic with very solid capital positions, which should allow them to pay out better dividends.
They may not be in line with the massive pay outs of the past but the days of banks deferring and slashing dividends now appear to be over.
As ANZ chairman Paul O’Sullivan said last week, he understands the need for bank shareholders to earn dividends but in the future such payments will need to be made in the context of economic conditions and will also need to be sustainable for the bank’s balance sheets.
That is not the only regulatory free kick that has been paid to the banks.
Those pesky responsible lending rules introduced after the Royal Commission that were forcing banks to learn a lot more about their borrowers than previously was the case are now gone, forced aside by the need to speed up the granting of loans and putting the onus back on customers to be responsible about how much they borrow.
There is still evidence that the banks are still being careful about granting new loans but the with refinancing and super low fixed rates now in the market, activity is increasing greatly.
Borrowers increasingly confident
All of these now demolished barriers would be irrelevant if it were not for consumer confidence.
That confidence has been coming through strongly, not just in answers to surveys but in real life through the quick return to business as normal.
As ANZ chief executive Shayne Elliott said last week, 92% of customers who deferred mortgage payments in Australia were now back on track, with deferred business loans also quickly returning to normal.
It is a similar picture for the other big banks, although, of course, the remaining rump of these frozen loans could be much more difficult to deal with.
However, with property prices strong and generally rising and the property market switching from caution to “fear of missing out”, there is a considerable cushion even for those borrowers who may be forced to sell.
That means that the very large provisions for bad loans that were made at the height of the COVID pandemic may not be needed, or at the very least may be much larger than required.
That would be great news for the big banks and their shareholders, with some of those provisions further bolstering the bank’s capital position, improving the ability to pay larger dividends to shareholders.
Market is pointing to better dividends
The final barrier to fall in the quest for a resumption of juicy bank dividends is the confidence of investors in the big banks.
Since the cratering of bank share prices back in March as the world belatedly woke up to the economic dislocation that could be caused by the pandemic, the share prices of all of the banks have staged a remarkable recovery.
They may not be quite back to the levels they reached back in February but most of them are now within striking distance of those levels – a remarkably fast recovery given the extent of the March crunch of 40% or even more.
Indeed, the recovery of the bank share prices has been one of the key ingredients in the recovery of the Australian share market overall, given their size and importance on the ASX 200 index.
Stronger share prices are not just good news for investors – they greatly increase the flexibility of the banks to raise more capital if needed and to continue capital preserving behaviour such as dividend re-investment schemes.
It would be foolish to expect that banks will now magically return to a 2019 future with lush and absolutely reliable rising dividends.
However, with the main barriers to reinstating dividends now having been removed and bank dividend yields still vastly superior to term deposit rates, the future for bank investors looks considerably rosier than it did back in the dark days of March.