The time has officially arrived to say goodbye to your banking dividends.
After moves by the New Zealand government to halt Aussie banks paying dividends, the Australian Prudential Regulation Authority (APRA) has ordered the banks to slash dividends on home soil.
Adding further to the Aussie big four banks’ woes, global credit ratings agency Fitch Ratings downgraded the long-term issuer default rating of the four major banks from AA- to A+.
The ratings agency has maintained the rating outlook for the major Australian banks as negative, reflecting the major downside risk to the economic outlook considering the evolving COVID-19 global situation.
In the opening hour of trade this morning, the Big Four banks are trading lower, with National Australia Bank Ltd [ASX:NAB] (-3.16%) and Westpac Banking Corporation [ASX:WBC] (-4.29%) the hardest hit.
Big four Banks’ desperate to get back in the good books after royal stuff up
The banks’ response to customers during the COVID-19 pandemic has certainly been clear.
Offering initiatives such as repayment holidays to struggling customers and funding for small businesses to score brownie points with the public.
No doubt the banking industry is desperate to repair its public image after its gritty underside was exposed during the Royal Banking Commission last year.
The smattering of assistance the banks are offering to customers may simply be a way to offset bad and doubtful debts.
A carefully calculated goodwill gesture, you could say.
Fitch noted in its credit ratings that bad and doubtful debts flowing from the crisis could impair loans for an elevated period.
It’s a balancing act
The Big Four are in a precarious position.
With the gathering storm of fintech start-ups nipping at the heels of their profit, saving face with the public has never been more important.
On the other hand, the banks must answer to their shareholders.
Which, whether you care to admit it or not, is a big chunk of the invested population via direct ownership or our superfunds.
Depending on allocation, of course.
As such, a broad spectrum of society relies on the Big Four banks’ dividends.
Offering concessions on loans and business funding hits profits (and dividends) but helps those who are struggling.
It is in many ways a case of doomed if you do, doomed if you don’t.
Fitch said it expects the deterioration of debts to become more evident in six to 12 months.
Adding that the sharp rise in unemployment and the disruption caused by the pandemic is likely to escalate non-performing loans during 2021.
This could mean that dividends could be missing in action for some time.
Some analyst estimates published in the AFR, say banking dividends could be cut by 50% for the next 12 months.
So, what can you do to protect yourself from a sharp cut to dividends?
Here’s a two-pronged strategy to help overcome the financial implications of the COVID-19 pandemic.
For Money Morning