Bank dividends would defy fiscal downturn
With banks generating millions in excess capital, Commonwealth Bank, ANZ and NAB have all increased their dividend payout ratios in recent months, while Westpac paid a special dividend.
In a report published on Wednesday, credit rating agency Moody's found the higher payout ratios of about 75 per cent were sustainable, even during an economic downturn.
While households carry much more debt today than they did two decades ago, in recent years banks have been working hard to build up capital as a buffer against losses.
"Our scenario analysis suggests that, in a cyclical economic downturn akin to that experienced during the 1991 recession, the banks would be able to sustain the modestly increased dividend payouts, and maintain capital ratios at strong levels," Moody's says.
If Australia suffered a more severe collapse such as the housing meltdown in the United States during the global financial crisis, big four shareholders would see dividends cut.
Under these circumstances, they say banks would suffer "material" declines in their capital levels and would have to cut dividends and raise extra capital.
The report comes as some market analysts predict banks may seek to further increase their dividends later this year because weak demand for new loans leaves lenders with excess capital.
Frequently Asked Questions about this Article…
Moody's found that the big banks could sustain modestly higher dividend payout ratios — around 75% — and maintain strong capital ratios in a cyclical downturn similar to Australia's 1991 recession. In other words, shareholders could expect to keep receiving the same share of profits in a recession of that severity.
According to the article, Commonwealth Bank, ANZ and NAB have increased their dividend payout ratios in recent months, while Westpac paid a special dividend.
A dividend payout ratio is the share of profits a bank returns to shareholders as dividends. A roughly 75% payout ratio means banks are distributing about three quarters of their profits to shareholders. Moody's judged that level to be sustainable even in a downturn similar to the early 1990s, given current capital buffers.
Banks have built up millions in excess capital in recent years as a buffer against potential loan losses. That stronger capital position makes it more likely they can sustain higher dividend payouts during ordinary economic downturns.
Yes. Moody's says if Australia experienced a severe housing collapse like the US during the global financial crisis, the big four banks would suffer material declines in capital and would likely have to cut dividends and raise extra capital.
Some market analysts are predicting banks may seek to further increase dividends later in the year because weak demand for new loans is leaving lenders with excess capital to return to shareholders.
The article notes households carry much more debt today than two decades ago, which could raise risk. However, banks have been actively building capital buffers in recent years, and Moody's analysis suggests those buffers would help sustain dividend payouts in a downturn similar to 1991.
For everyday investors, the key points from the article are: big banks have increased dividend payouts and built capital buffers, Moody's believes those payouts are sustainable in a 1991-style recession, but dividends could be cut if Australia faced a severe housing-market collapse comparable to the global financial crisis.
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