New Zealand halts ASX bank dividends
News that New Zealand’s central bank has followed other major markets, namely the UK and Europe, in halting ASX bank dividend payments led to more selling of the domestic majors – CBA, NAB, WBC and ANZ – yesterday, which were down an average of close to 5%.
What impact does this have on ASX dividend stocks?
The NZRB decision is most relevant because it means the NZ subsidiaries of the Australian banks will not be able to pay dividends to their Australian parents. About a tenth of the earnings of the big four banks come from New Zealand. Significantly, the Australia’s financial regulator APRA said Australia’s banks “remain well capitalised” and the Federal Government indicated it was not considering directing the banks to suspend dividend payments “at this point” but that the policy was under consideration by the Council of Financial Regulators.
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Points to consider regarding ASX bank dividend stocks.
The major banks had already been planning for lower dividends from their NZ subsidiaries in order to help meet higher regulatory capital requirements that had been flagged by the RBNZ.
Banks are the boiler room of any economy and Australia’s big four listed on the ASX are in good shape, which is in sharp contrast to their collective position in 2006 at the onset of the financial crisis. They have raised more than $50bn in equity capital in the past five years and are well capitalised with regulatory capital ratios above the minimum level set by the Australian regulator, APRA. This acts as a shock absorber for times like this. Plus, in January and February they raised a lot more funding than they would normally require (as luck would have it).
The big banks have zero reputational capital as a result of the 2018 Hayne Royal Commission. This is a challenge for them, but also an opportunity to restore this deficit. We were at a meeting with one of the big four when this comment was made by an employee: “This time it’s not our fault! We’re actually helping people.”
The decision banks may make to give mortgage holders a six month repayment holiday and extending debt covenants makes business sense. This will stem bad and doubtful debts on the one hand. On the other, households and businesses will still have to pay off the full value of their loans, plus the accrued interest.
The accrued interest is occurring at a time of historically low interest rates. Capitalising at a rate of 3.5% is a lot different from capitalising at 10%!
At the start of the crisis (late February) the banks were incredibly cheap based on a historic comparison. They are now cheaper, having fallen in line with the market (partly because they are a big part of the market). In 2007 banks were much more expensive.
We have previously stated that the banks will be cutting their dividends, which is a big difference from pulling their dividends as the case for most companies.
We believe, however, that there will be a political imperative to cut 2H20 dividends, indeed, any dividend payment that is scheduled in the next 6-9 months. The big banks will be under pressure to share the pain of their corporate customers, and possibly may in fact make limited profits from which to pay those dividends during that period (higher costs, deferred interest income, fees waived etc).
This week the Federal Government announced its $130bn JobKeeper stimulus package, which effectively gives a basic wage to up to six million workers. On top of the Government’s decision during and after the financial crisis involving cheap funding and deposit guarantees, we’re pretty sure the Australian Government has the Banks’ collective backs.
We will be doing an update in next weeks Blue Chip Value Report on the sustainability of the ASX banks’ dividend stock payments. At this point we remain positive at current prices for investors with a long-term investment horizon. The market is very volatile so buy selectively in small parcels. Don’t chase prices up. Be patient and stick to the price you are comfortable buying at, as another opportunity will arise
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