Bank dividend downturn?

Business confidence is dangerously low and if this continues banks will have to increase their loan loss provisions – which could hit investor returns.

Are bank dividends in danger? It would seem so. The economy may be deteriorating as rapidly as the fall in the Australian dollar. Business confidence has ebbed to dangerously low levels.

Yet credit quality seems stable. Odd. But such a phenomena cannot continue if economic growth does indeed slide. Loan loss provisions by the four biggest banks, ANZ Bank, Commonwealth Bank, National Australia Bank and Westpac will have to rise. The risk for investors holding bank stocks is that share prices will fall along with their earnings. Some analysts argue that bank dividends will remain steady despite a fall in profits as long as earnings per share deterioration is no more than 6% (see Robert Gottliebsen's Making BHP more like CBA).

Bank fundamentals are sound, despite all the noise swirling around on the economy, some bank analysts argue. Although loan growth is weak, margins are steady. The funding environment for the banks has improved since 2008 and 2009. There has been no mismanagement of the cost base. On average a 6% fully-franked dividend for the banks over the course of the next financial year is attainable, one analyst says.

The wild card is the economy. Any sharp deterioration in the economic climate would cause a sharp increase in loan loss provisions. Bank earnings would fall and the payout ratio from profits may be cut, further hurting bank share prices. Such a course of events would also cause the S&P/ASX200 Index to fall. Financial stocks make up about a third of the market value of the benchmark index. 

Meanwhile, at 1028 AEST, the S&P/ASX200 Index was up 6.152, or 0.1%, to 4847.90. The index has fallen 1.5% since June 1.

ANZ Bank shares were up 5 cents, or 0.2%, to $28.45. The stock has gained 3.2% since June 1.

Commonwealth Bank shares added 32 cents, or 0.5%, to $69.31. The stock has risen 3.7% since June 1.

NAB shares fell 1 cent, or 0.03%, to $29.16. The stock has edged 0.6% higher since June 1. Westpac shares rose 16 cents, or 0.6%, to $28.51. The stock has slid 0.5% since June 1.