The outlook for Australia’s Big Four banks has worsened this morning, with the Reserve Bank of New Zealand (RBNZ) announcing a freeze on all dividends.
The RBNZ has put in place a restriction on the payment of dividends on ordinary shares given the widespread economic uncertainty caused by the coronavirus pandemic.
All of Australia’s banks have opened lower today with Australia and New Zealand Banking Group Ltd [ASX:ANZ] and National Australia Bank Ltd [ASX:NAB] the hardest hit, shedding 5.40% and 5.31%, respectively.
Australian dividends could come under pressure
Today’s move by the RBNZ is an attempt to stop the Aussie Big Four, which dominate the NZ banking sector paying dividends back to their parent banks in Australia.
The hope is that this will build up more earnings to protect the NZ economy from the COVID-19 crisis.
Similar moves have been made by banking regulators overseas to ensure banks can withstand the growing losses as the current economic environment worsens.
The reason why this could hurt Aussie investors is that the major banks rely on cash from New Zealand to pay group dividends.
Three out of the four banks responded (with the exception of Westpac Banking Corporation [ASX:WBC]), with Commonwealth Bank of Australia [ASX:CBA] and NAB ensuring shareholders the restriction should not have a material effect on their Level 1 capital positions (CET1).
CET1 is the core measure of a bank’s financial strength from a regulator’s point of view.
However, it is estimated that NZ dividends paid to Australian parents account for between 8–12% of the group dividend.
So, I take this with a grain of salt.
Banks in both England and Europe have also been ordered to suspend paying dividends.
While it is uncertain whether banks will freeze dividends in Australia, Citi Bank analysts predict the banks could cut dividends by 15–18%.
How likely is a dividend freeze?
The Big Four banks are often referenced to as the pillars of the Australian economy.
This is because they fund much of the commerce that happens in the country — and if they were to go under, who would be left to pick up the pieces?
For this reason, APRA is conscious about getting too involved with restricting how the banks pay dividends.
Particularly under the current crisis aggressive action on dividends, and how it could hit bank equity prices.
Thus, making it more expensive for banks to raise additional equity if they need it.
For now, at least, I do not expect any freeze on the banks’ dividends in Australia given the capital strength of the banks.
But I do expect the RBNZ dividend freeze is pushing us closer towards a dividend disaster.
The banking sector is rapidly changing and income investing along with it.
Learn why the banks may no longer be a staple of income investing and where dividends are headed in our free report. Download it here.
For Money Morning