Australian banks’ dividends to stay flat amidst cash earning pressures

The higher payouts in H1 were to establish shareholders’ confidence, S&P said.

Despite giving out slightly higher payouts in the first half of the fiscal year, Australian banks’ dividends are likely to stay flat, with lenders flagging pressures on cash earnings, reports S&P Global Ratings.

ANZ Group, Westpac Banking Corp., and National Australia Bank (NAB) all reported lower net profits for the October 2023 to March 2024 period, citing “strong competition.” 

ANZ’s cash earnings fell to A$3.55b; NAB’s cash earnings also fell to A$3.55b; whilst Westpac’s net profit dropped by 16% year-on-year to A$3.34b. 

Only the Commonwealth Bank of Australia– which operates in a different fiscal year– reported a slight uptick in cash earnings in its latest financial results, at A$5.03b in the first half ending 31 December 2023.

Despite the lower profits, ANZ (83 cents), Westpac (75 cents), and NAB (84 cents) all declared higher interim dividend payments for the period. This indicates their healthy capital and liquidity positions, S&P said, adding that they can afford the increases in payouts and top-up of buyback program.

CBA had also raised its interim dividend to A$2.15 per share, from A$2.1 per share previously.

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The higher dividends were done likely for the banks to stabilize the confidence of the shareholders whilst profits are declining across the board, noted Ralph Chen, senior research analyst, Asia-Pacific dividend forecasting at S&P Global Market Intelligence.

"Looking ahead, we expect the banks to keep the dividends flat compared with the interim dividend, given that the interest rate environment would not change in [the] short term and the competition for loan book will remain intense," Chen said.

Following reports of higher dividends, the banks’ share prices have ticked up, he observed. 

Furthermore, three banks have announced capital management initiatives via share buybacks. Westpac announced a A$1b increase to its existing buyback plan to A$2.5 billion. NAB increased its on-market buyback by A$1.5b. ANZ plans to buy back up to A$2b of shares.

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"The buybacks and even lifting dividend payout ratios to grow the ordinary dividend appears to reflect banks becoming increasingly comfortable that stress in the loan book is manageable, and that holding such high levels of provisions, and capital, is too conservative," Nathan Zaia, a senior equity analyst at Morningstar told Market Intelligence in an email.

Looking ahead, Zaia expects “modest” margins improvement over the medium turn. However, bad debts to loans will rise back to historical averages.

In that kind of setting, the banks should achieve low- to mid-single digit earnings per share and dividends per share growth, Zaia added.