Investors brace for $5bn CBA equity raising
THE AUSTRALIAN AUGUST 10, 2015 12:00AM
Michael Bennet
Reporter
Sydney
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn Source: Supplied
Commonwealth Bank will this week hand down its most hotly anticipated annual results in years, with the lender’s profit of more than $9 billion to be overshadowed by efforts to increase capital levels and the health of its loan book.
After ANZ got the jump on its rival and raised $2.5bn from institutional shareholders last week, investors are bracing for CBA to press the button on an equity raising of up to $5bn at its results on Wednesday.
Bendigo and Adelaide Bank will today report an expected $435 million full-year cash profit and provide insight into the industry’s margins amid hot competition to write mortgages. Also today, National Australia Bank will also release its third-quarter earnings statement.
But the main event remains CBA’s result and potential capital raising, with investment banks UBS, Goldman Sachs, Credit Suisse and Morgan Stanley jostling to manage the potential deal, sources said.
“All eyes turn to CBA (on) Wednesday with an estimated ‘known’ capital shortfall of about $4.5bn,” Credit Suisse analysts said after ANZ’s deal. “While we could feasibly see a period of rolling dividend reinvestment plans, we consider a larger raising to be defensible and ultimately more prudent.”
Richard Wiles, an analyst at Morgan Stanley, said the last time the major banks undertook large equity raisings was during the global financial crisis, when it proved that the “first mover” could achieve a better issue price. He said that, with NAB and ANZ having completed equity raisings, investors had “turned their attention” to CBA and Westpac’s capital management initiatives.
The big banks are raising capital after the Australian Prudential Regulation Authority last month revealed their mortgage “risk weights” would have to increase to at least 25 per cent by July next year, equating to a combined $12bn in additional capital. APRA also told the banks that their overall “common-equity tier-one” capital ratios would need to rise, reducing their leverage and returns. Mr Wiles said: “Our forecasts assume partial second-half 2015 DRP underwriting to raise $2.5bn at CBA and $2bn at Westpac. However, for CBA, we see merit in a capital raising of $4bn-$5bn at its result.”
On Morgan Stanley’s numbers, the raising would boost CBA’s lagging CET1 to 9.4 -9.7 per cent, albeit not including the looming refinancing of debt in its wealth subsidiary with equity that will drag on its capital levels.
Analysts believe the major banks will ultimately need CET1 ratios of at least 10 per cent.
For the year to June 30, CBA is expected to report a 5 per cent rise in cash profit to a record $9.1bn and a final dividend of $2.21. But CBA’s surprisingly soft third-quarter trading update in May and ANZ’s slide in earnings last week have intensified the finer details of the result. ANZ’s third-quarter earnings fell 8.5 per cent to $1.73bn as bad debts blew out to 25 basis points of gross loans, which the bank attributed to balance sheet growth and problems in the mining and agriculture sectors.
UBS analyst Jonathan Mott said that, given the market expected loan growth to slow in the face of APRA’s cap on investment property lending, the focus would be on CBA’s margins and bad and doubtful debts. “The focus of the results will likely be on signs of deterioration in asset quality, how quickly BDD normalises and CBA’s mechanism for raising capital,” he said, estimating CBA at $10bn short of the “10 per cent CET1 line-in-the-sand” level.
But Mr Mott noted that CBA was in a “privileged position”, given its lofty share price reduced the dilution from capital raisings and much of the cost could be “passed on to consumers”. All the banks have recently begun passing on the headwinds, raising interest rates for property investors despite the Reserve Bank not touching the cash rate.
CBA kicks off $5bn capital raising as profit hits record $9bn
THE AUSTRALIAN AUGUST 13, 2015 12:00AM
Michael Bennet
Reporter
Sydney
Commonwealth Bank chief Ian Narev has affirmed that the nation’s biggest dividend payer can defend its payout policy against rising capital requirements, as he kicked off a $5 billion equity raising that will weigh on the group’s sector-leading returns.
Handing down a record $9.1bn profit, CBA yesterday confirmed widespread speculation and unveiled a $5bn renounceable entitlement offer of new shares at $71.50, a 10.5 per cent discount to the dividend-adjusted closing price of $79.90.
While the equity raising sparked a dive in the big four’s share prices, Mr Narev issued upbeat comments that business lending growth was improving and urged business leaders and politicians to bed down key reform, particularly of the tax system, to support the nation’s healthy longer-term outlook.
His comments came after a tough second half of the financial year for CBA, including an uptick in bad debts, lower margins and revenue growth of just 0.6 per cent.
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“The foundations are there to build a sustainable long-term economy, which is a huge advantage relative to economies elsewhere in the world, but we’ve got to get to the point where the policies that are going to support that economy get done,” he said.
CBA said the capital raising — which followed ANZ’s $3bn placement last week — would boost the bank’s “common-equity tier-one” (CET1) capital as a portion of risk- weighted assets to 10.4 per cent, up from 9.1 per cent.
Shareholders will be offered one new share for every 23 held in the deal, which Citi analyst Craig Williams said was likely to be “well supported”. But he noted that CBA’s result provided “more evidence of the tough revenue environment for major banks”.
Analysts also said the bank’s CET1 capital ratio would fall below 9 per cent once higher mortgage “risk weights” and other regulatory headwinds were factored in, pressuring the bank’s dividend payout ratio of 70-80 per cent of profits or requiring further capital.
For the year to June 30, CBA’s cash profit rose 5 per cent to a fresh record $9.14bn, in line with expectations. The final dividend of $2.22 a share, payable on October 1, took the total payout to $4.20, a payout ratio of 75 per cent. As the nation’s biggest home loan lender, Mr Narev said the banking regulator’s recent clarity on higher mortgage risk weightings had provided certainty that the bank would need $4bn by July next year.
He said while the market could “make their own assumptions” on CBA requiring more capital in the future, the bank assessed the outlook for asset growth, bad debts and regulatory changes — such as the coming global “Basel IV” reforms — at each result.
“We’re very clear on what our dividend policy is and how important that is to our shareholders and we’ve picked $5bn because we believe it’s the right amount to respond to the changes … as we watch the environment and adjust capital in response,” Mr Narev said.
“We’re very comfortable with it (the $5bn amount) ... whether or not there are further changes in the wind ... that’s always a risk.”
The banks are raising capital after the Australian Prudential Regulation Authority last month confirmed that the big four would have to increase mortgage risk weights to at least 25 per cent, plus boost overall capital levels to “unquestionably strong” levels.
The raisings — National Australia Bank raised $5.5bn in May — come after APRA agreed with the Murray financial system inquiry that they were not among the strongest capitalised banks in the world given their reliance on offshore funding and heavy exposure to housing.
Mr Narev conceded CBA’s sector-leading return on equity — which slid to 18.2 per cent — “will come down a bit”, denting its relative premium compared to its lower returning rivals.
The banks recently increased borrowing rates for property investors to offset higher capital levels, which Mr Narev conceded could be just the first “repricing” response depending what other lenders do in the “competitive market”.
“It’s been our thesis the banks’ RoEs will decline over time and thus the high prices to book are inappropriate despite the attractive dividend yield,” said Brad Potter, head of equities at Nikko Asset Management.
“The banks are trying to claw back profit and thus protect the RoE via the mortgage repricing programs. The expectation is that the banks will also try to further reprice owner occupier home loans as well.”
While CBA’s large retail arm grew profits 5 per cent to $3.9bn, its growth was outpaced by the New Zealand arm’s 17 per cent spike in profit. Profits from the bank’s wealth arm slid amid rising compliance and remediation costs for misconduct.
Macquarie analyst Mike Wiblin said the capital raising would be 4.3 per cent dilutive.
“Overall while second half trends were reasonably weak, we expect the capital raising will provide the bank with the impetus to continue its repricing crusade, with the blessing of both APRA and the RBA,” he said.
ANZ head defends equity raising
THE AUSTRALIAN AUGUST 13, 2015 12:00AM
Rowan Callick
Asia Pacific Editor
Melbourne
ANZ chief executive Mike Smith said his bank’s $3 billion equity raising that triggered a 7.5 per cent share price slide last Friday underlined that capital was a resource that banks have to manage carefully.
Even so he described Friday’s share price reaction as “a bit ill-considered”.
“When everybody calms down I would think the equity raising will be seen as a good decision, a clever deal,” Mr Smith said.
He also suggested a sale of ANZ’s minority holdings in Asian-based banks could move ahead, but insisted there won’t be a “fire sale” of assets.
His comments came as Commonwealth Bank became the latest lender to launch a mega-capital raising, tapping investors for $5bn through renounceable entitlement offer.
Mr Smith was speaking in Port Moresby, before flying to the bank’s New Zealand board meeting in Auckland.
“You can be brilliant in hindsight. We thought long and hard about the most equitable and efficient and the quickest way of raising equity.
“We wanted everyone to get as fair a deal as possible, taking into account the size of the issue. A rights issue of one in 30 would have looked a bit strange, and when we did the numbers the smaller retail shareholders would have been disadvantaged, so we felt a share placement was the right way to go.
“Big retail shareholders are in a different position, but they were likely to have got an allocation from their brokers on the placement.”
Two of the other major banks had raised capital before ANZ, “but we were the first following the APRA announcement (of increased capital requirements) — so we knew what we were dealing with. The APRA announcement brought forward the timing — which we admit we thought would be another year at least”.
“But it’s important to get some certainty into the market, to draw a line under that and move on”.
The requirements for banks to hold more capital added another reason for selling minority interests, he said — with ANZ valuing its own Asian partnerships at about $5bn.
“Under APRA guidelines,” he said, “they don’t accept such stakes as worth anything, effectively.”
This is strange, he added, with Australia being the only country with such a regulation.
“But we have to work within the rules,” he said.
The reporter was a guest of ANZ in Papua New Guinea.
(08-08-2015, 08:56 PM)greengiraffe Wrote: [ -> ]$27 billion wiped off banks
Date
August 7, 2015
James Eyers and Clancy Yeates
ANZ lead the falls for the Big Four, closing 7.5 per cent lower on Friday alone. Photo: Jesse Marlow
The Australian sharemarket suffered its worst day in three years on Friday as the spectre of rising bad loans and capital raisings to satisfy nervous regulators saw investors wipe $27 billion off the value of the big four banks over the past two days.
Shares in ANZ Bank slumped the most, plunging by as much as 8.5 per cent in early trade on Friday as the bank emerged from a trading halt after raising $2.5 billion from institutions on Thursday.
The sell-off in bank stocks drove a broader dive in the ASX 200, which tumbled 2.4 per cent, and came as investors fretted about ANZ's trading update on Thursday which revealed higher provisions for bad debts on loans to the resources and agriculture sectors.
ANZ Bank chief executive Mike Smith rejected claims the bank's retail shareholders received a raw deal.
ANZ Bank chief executive Mike Smith rejected claims the bank's retail shareholders received a raw deal. Photo: Simon Dawson
ANZ chief executive Mike Smith defended the move to raise capital on Friday and told staff the rise in provisions was not because more individual customers were falling behind, but because of "collective provisions," which can indicate a general decline in loan quality.
"Although we need to work closely with our customers in this environment, our sense is we are bumping along the bottom of the credit cycle rather than seeing any fundamental shift," he said in an email to staff.
Mr Smith also rejected claims the bank's retail shareholders received a raw deal because many will have their investments diluted through the institutional placement.
"60 per cent of ANZ shares are held by institutional shareholders and the share purchase plan gives all our individual shareholders the opportunity to purchase stock at a discount to the market," he wrote.
Stalwarts of the equity market for many years, the big banks are under growing pressure as regulators force them to raise more equity to protect the financial system from the risk that a house price bubble in Sydney and Melbourne will burst.
Compounding investor nerves, over the past week banking analysts and mortgage insurers have pointed to additional risks in Brisbane and Perth housing, which is looking increasingly vulnerable to the mining downturn and falling capital expenditure by companies.
"We might just be starting to see some chinks in their armour," Morningstar analyst David Ellis said of the banks.
After initially expressing confidence that additional capital could be generated over time, banks bosses had also been caught by surprise by the speed that regulators want to see bigger buffers, Mr Smith said on Thursday.
Analysts are expecting Commonwealth Bank will announce a multi-billion dollar capital raising when it reports its full-year results next Wednesday after this week's move by ANZ and National Australia Bank's $5.5 billion rights issue in May.
Westpac shares were also under pressure on Friday as analysts suggested it might also have to raise more capital given the upward trajectory of its competitors.
For investors, these higher levels of capital may restrict dividend growth. Morgan Stanley analyst Richard Wiles said ANZ's dividends were likely to be flat for the next three years because of more stringent capital requirements.
"In our view, ANZ's trading update and equity raising highlight downside risk to consensus earnings per share estimates from revenue headwinds, higher loan losses and more onerous capital requirements," he said.
The outlook for the banks is also being clouded by the softer outlook for the economy. In its August statement of monetary policy published on Friday, the Reserve Bank of Australia downgraded in economic growth forecasts, saying GDP growth for the year to June 2016 would be 0.5 per cent lower at 2.5 per cent, while growth for the year to December 2016 would be 3 per cent, 0.25 per cent lower than previously forecast.
The central bank said that while housing investment and the positive impact of the falling Australia dollar would support growth, it would be below average due to falling mining investment.
ANZ, which has a higher exposure to the resource sector than the other big banks, said on Thursday it would raise its collective provisions for resource and agriculture exposures. Impairments were $366 million for the third quarter and are expected to be $1.2 billion for the year, the banks said, higher than the market's expectations of $1.05 billion.
"Weak performance in the third quarter combined with a deteriorating credit quality outlook we believe rightfully left the market concerned," CBA analyst Victor German said.
"Although at this stage it's not clear whether credit quality deterioration is a sectorial issue or ANZ specific, we expect it to weigh on sentiment and the sector's performance in the near term."
Other banking analysts are also pointing to the prospects of bad debts rising as lower capital expenditure by companies puts pressure on GDP and the unemployment rate.
"We continue to be concerned with the economic impact from the dramatic slowdown in capex Australia is likely to face over the next two years," said UBS analyst Jonathan Mott.
"If the sharp reduction in non-mining capex and GDP flows to higher levels of unemployment and non-performing loans, the banks' bad debt charges may begin to rise sharply."
ANZ shares closed 7.5 per cent lower on Friday at $30.14.
Banking: cracks appear in the four pillars as natural order is disturbed
THE AUSTRALIAN AUGUST 15, 2015 12:00AM
Richard Gluyas
Business Correspondent
Melbourne
Six months after their repeated assurances that the financial system inquiry’s findings would not trigger a scramble for capital, the major banks have siphoned $14 billion from investors and effectively gone “ex-raising” for the foreseeable future.
Job done, with a minimum of fuss.
But as balance sheets flex to accommodate the call by regulators for more loss-absorbing capital to be held against mortgage portfolios, the natural order of things in domestic banking has been disturbed, and it’s almost gone unnoticed.
First, some small cracks have started to appear in the previously unassailable Commonwealth Bank edifice, with the bank’s premium rating now under heavy scrutiny after a weaker than expected second-half result.
More broadly, there are signs that the incredibly benign credit environment, supported by 24 years of economic growth and historically low interest rates, is finally starting to turn.
These are not inconsequential shifts.
Based on consensus earnings expectations, CBA has traded at a strong premium to its major-bank rivals since as far back as 1998.
The premium accurately predicted that the bank’s earnings per share would rebound more strongly than Westpac, ANZ Bank and National Australia Bank in 2009, after the worst of the financial crisis had passed.
CBA, which remains in a trading halt after its $5bn capital raising on Wednesday, is yet to surrender its hard-won premium, commanding a forward price-earnings ratio (share price divided by earnings per share) of 14.5.
Allowing for dilution caused by the recent spate of raisings, the comparable figure for Westpac is 12, while NAB and ANZ are on 11.2 and 11.1, respectively.
The market, though, thinks that CBA’s grip on its customary premium is loosening.
The headline on CLSA analyst Brian Johnson’s note on the annual result said it all: “PE premium hard to justify — looks vulnerable to a de-rating”.
Over at Goldman Sachs, analyst Andrew Lyons noted CBA’s confidence that its capital raising would leave the bank comfortably placed among the best capitalised lenders in the world.
“We expect further capital build will be necessary for both CBA and the sector over the next two to three years,” Lyons said.
Based on an expected erosion of return on equity, the bank’s earnings and balance-sheet trends were insufficient to support the scope of its current premium.
Capital, of course, is a sector-wide challenge.
While CBA’s raising takes its tier one capital ratio to 10.4 per cent, the higher mortgage risk-weights required by July next year will bring the ratio back down to 9.4 per cent.
Over time, the sector’s average tier one ratio is expected to drift towards 10 per cent, with CBA also having to allow for $1.8bn of capital benefit from debt in its Colonial group that will ultimately be phased out.
Lyons estimates CBA will have a $4.2bn capital shortfall based on the expected capital benchmark of 10 per cent, with Westpac at $6.1bn, NAB at $4.2bn and ANZ at $3.5bn.
The major banks’ vast profit-churning businesses will enable most of this amount to be raised organically and through select asset sales.
On the bad-debt front, the strong tailwind enjoyed by all the nation’s banks in recent years appears to be running out of puff, despite some mixed signals during the mini-reporting season.
On Monday, NAB briefly allayed fears that the cycle had started to turn, revealing that impairments in the third quarter had fallen 15 per cent to $193 million, mainly due to lower charges in Australian banking.
CBA refuelled the fire on Wednesday, with the bad debt charge lifting 25 per cent half-on-half from $440m to $548m and the fourth-quarter expense up 14 per cent on the third quarter.
Consistent with other results, management highlighted emerging stress in mining towns in WA and Queensland, and further concern on New Zealand dairy outlook.
The most significant change in forward-looking domestic indicators was in personal loan arrears, which are closely related to unemployment levels and have been rising consistently for about six months.
Queensland and WA were again the hot spots, representing about 30 per cent of the bank’s personal lending portfolio but accounting for about 60 per cent of the arrears.
CLSA’s Johnson said CBA’s share register now has a stronger, less loyal institutional presence.
Banks will need to raise even more capital, says Fitch
BUSINESS SPECTATOR AUGUST 18, 2015 2:46PM
Michael Roddan
Reporter
Global ratings agency Fitch says the “big four” banks will need to increase their capital reserves by an even larger amount than the banking regulator has requested, a move which could curtail potential dividend growth.
Fitch said today a further increase in capital by Australia’s four largest banks was likely over the medium term, despite the Australian Prudential Regulation Authority’s recent rule change requiring the lenders to increase their minimum average mortgage risk-weights to at least 25 per cent by July next year, up from the current position of around 16 to 18 per cent.
The changes in reserve requirements have been made in line with recommendations stemming from the government’s Financial System Inquiry chaired by David Murray, and the global banking Basel framework.
While shoring up the capital reserves of the banks will make the lenders sturdier and more resistant to economic downturns, the rule changes have spooked investors who rely on the high-yielding bank stocks for dividend payments.
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Investors sold banking stocks after the lenders announced multi-billion equity raising plans.
Since a high point reached in March this year, Commonwealth Bank has dropped 16 per cent, while ANZ and Westpac are down 20 per cent and NAB has declined 19 per cent.
ANZ has tapped financial markets for $3 billion, following CBA’s $5bn capital raising, and NAB equity raising of $5.5bn in recent weeks. Westpac raised $2bn through a dividend reinvestment plan in May, though there has been ongoing speculation that it may look to raise more capital to meet the stricter requirements.
“The increase in capital will be supportive of the big banks’ current ratings, though upgrades are not likely given their already high ratings,” Fitch said.
CBA’s additional capital from its raising will add 135 basis points to its common equity Tier 1 capital (CET1), bring its CET1 ratio to 10.4 per cent on a pro-forma basis, Fitch said.
ANZ’s moved will add up to 78 basis points to bring its ratio to around 9.3 per cent.
Australian banks could have met APRA’s increased capital requirement through internal capital generation given their robust profitability, Fitch said, but added that the banks’ recent efforts to raise capital in part “reflect positioning for a broader range of regulatory changes”.
The ratings company believes that the recent higher risk-weights are likely to be only the first of a series of new measures to be implemented.
The ratings agency said the Basel committee was also expected to finalise their proposals for an update to the global framework by the end of 2015 or early next year, and along with APRA’s domestic regulatory changes would likely to “result in yet higher capital requirements”.
Fitch said the ratings outlook for the banks was stable.
Australia’s mortgage delinquency rate falls
- AAP
- AUGUST 27, 2015 7:28AM
[b]Tasmanians and Queenslanders are the nation’s worst for keeping up with home loan repayments.[/b]
A report from ratings agency Fitch shows just under one in a hundred mortgages in Tasmania, or 0.99 per cent, were 30 days or more in arrears at the end of March.
In Queensland it is 0.95 per cent, compared to a national average of 0.85 per cent.
At the other end of the scale came the meticulous, punctual public servants of the ACT, with a delinquency rate of just 0.46 per cent.
That is streets ahead of the next best, NSW and the Northern Territory, both with an arrears rate of 0.76 per cent.
Victoria’s delinquency rate was 0.84 per cent, WA’s was 0.87 per cent and South Australia’s was 0.94 per cent.
The national average was down from 1.02 per cent a year earlier, with all states and territories in better shape than a year ago, aside from NT, which was steady.
Fitch said most of the 20 worst performing postcodes were in metropolitan regions, aside from the Queensland mining centre of Mount Isa.
“However, metropolitan regions overall performed better than non-metropolitan areas, especially in Western Australia, Queensland and Northern Territory where the slowdown and job cuts in the mining industry have been detrimental to mortgage performance,” Fitch said.
The figures were compiled from a study of over 988,000 loans, representing about 12 per cent of all home loans in Australia, Fitch said.
TOP 10 POSTCODES FOR MORTGAGE DELINQUENCY:
1 — 4502 Petrie, Qld — 2.4pct
2 — 4341 Laidley, Qld — 2.3pct
3 — 3214 Corio, Vic — 2.3pct
4 — 4825 Mount Isa, Qld — 2.1pct
5 — 4114 Kingston, Qld — 2.0pct
6 — 2262 Budgewoi, NSW — 2.0pct
7 — 5108 Salisbury, SA — 2.0pct
8 — 3337 Melton, Vic — 1.9 pct
9 — 3976 Hampton Park, Vic — 1.9pct
10 — 6066 Ballajura, WA — 1.9pct
Source: Fitch Ratings
AAP
- Sep 4 2015 at 5:15 PM
- Updated Sep 4 2015 at 5:35 PM
Unloved banks pass the dividend test, but investors remain cool on sector
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/5/n/m/p/image.related.afrArticleLead.620x350.gjf3xi.png/1441352126004.jpg[/img]Bank dividends look appealing but the sector is not in favour. Louie Douvis
More than $20 billion in annual dividends paid by the big four banks have been deemed safe in the event that Australia's economic situation worsens only slightly, unemployment rises and interest rates fall.
But in the event of a "moderate" recession, where interest rates fall to 1 per cent, unemployment rises to 8.5 per cent and house prices fall 15 per cent, dividends probably will be sacrificed.
Equity analysts at UBS found that based on the economic outlook and the current quality of bank loan books, investors could take a strong degree of comfort that dividends would not be cut as they were briefly during the financial crisis – if things stayed the same. The three-year bull run for banks, which started in 2012, has come undone.
Whether the current bear market in bank stocks turns out to be a bullish opportunity is still unknown, but the integrity of dividends is a relevant question for investors to explore at a time when yields appear on some measures attractive.
[img=620x0]http://www.afr.com/content/dam/images/g/j/f/k/e/6/image.imgtype.afrArticleInline.620x0.png/1441352109787.png[/img]
However, the re-emergence of cyclical forces in the banking sector means that yield alone might not be enough to sway investors.
And if a China hard landing sends the rest of Asia and Australia into shock, leading Australia to be stripped of its sovereign triple-A credit rating, banks are probably the last place any investor would look for cover.
"If you believe in this scenario, we suggest avoid the banking sector," UBS analyst Jonathan Mott advised in new research.
CYCLICAL BUSINESSES
"Banks are cyclical businesses. They do better when the economy's strong," fund manager Hugh Giddy, from Investors Mutual, said. "The market is behaving quite rationally in being a bit fearful of the banks."
He observed that for any stock, "the yield is most sustainable in companies where earnings are growing".
Three of the big four have just raised $16 billion collectively in fresh equity. At the same time, dividend yields are more than 6 per cent across the sector and seemingly at a record premium against term deposits.
The raisings coincided with a broader correction in Australian equities amid concerns about Chinese growth and downgrades to earnings expectations in the wake of reporting season in August. Economic growth slowed faster than forecast in the second quarter, it was revealed this week.
Even for experts, the relationship between defaults and dividends is unclear, because dividends are determined at boards' discretion.
Because of its Asia exposure, ANZ Banking Group's dividend was assessed to be slightly more vulnerable than its peers in the event of a regional economic deterioration, where a reduction in earnings could push the bank's payout ratio to a higher ratio than its board is comfortable with.
In the 2014-15 financial year, Commonwealth Bank of Australia paid $6.2 billion of cash back in dividends to shareholders, up from $5.5 billion in the previous fiscal year, for a payout ratio of 75.1 per cent. Its peers are yet to release full-year profits but based on the most recent results from March 2015 and September 2014, the sector unleashed $21 billion in dividends collectively in the past financial year.
Mortgage lending curbs working: RBA
- JAMES GLYNN
- DOW JONES
- SEPTEMBER 15, 2015 12:33PM
[b]Efforts by bank regulators to curb a surge in lending to property investors in the last year appear to be having some effect, the Reserve Bank says.[/b]
Double-digit house price growth in Sydney over the last year had prompted warnings of a potentially dangerous asset-price bubble, and risks of a shock to the economy should it burst.
The Sydney house price jump, which was also strong in Melbourne, prompted the Australian Prudential Regulation Authority, to tighten standards around lending to property investors at the start of the year.
Growth in credit to housing investors had grown to around half of all mortgage lending. Regulatory moves to stymie strong house price growth have also been seen recently in countries like Canada, the UK, and New Zealand.
“Members noted that very low interest rates would continue to support growth in dwelling investment and household consumption,” the RBA said in the minutes of its September 1 policy meeting.
“There were indications that the measures implemented by APRA had slowed the growth in lending for investment housing,” the minutes said.
“There had been a notable decline in the growth in lending for investment housing in July,” the RBA minutes added.
Earlier this year, the Treasury Department said an asset-price bubble had formed in Sydney, with Governor of the Reserve Bank of Australia Glenn Stevens saying some of the leverage being taken on by borrowers in Sydney for housing was “crazy.”
If the new curbs on mortgage investors continue to work, concerns about the need for potential additional APRA lending curbs will abate. If house price growth can slow nationally, it will also remove a hurdle to further interest rate cuts.
Interest rates were lowered to a record low of 2.0 per cent in May as the RBA reacted to slowing economic growth and falling commodity prices.
Recent data showed the economy grew at its slowest pace in four years in the second quarter, amid fresh warnings that Australia might soon slide into recession, its first in close to 25 years.
For now, the RBA maintains a neutral tone on the outlook for interest rates, repeating its recent mantra that future rate decisions will be made as economic data and conditions are assessed.
“It was appropriate to leave the cash rate unchanged (at the policy meeting),” the RBA said.
Still, the RBA said recent falls in the Australian dollar, would provide some support to the economy.
The Australian dollar has fallen by more than 25 per cent in the last year, removing a major headwind to the economy.
“The depreciation of the Australian dollar in response to the significant declines in key commodity prices was also expected to support growth, particularly through a larger contribution from net service exports,” the minutes said.
Resource exports are expected to add a lot more to the economic outlook over coming years, especially as new liquefied natural gas plants start production, it added.
The RBA was also watchful, but not too concerned about recent volatility in China’s currency and share markets, amid ongoing signs of an economic slowdown.
“So far, this volatility had not impaired the functioning of other financial markets and funding remained readily available to creditworthy borrowers,” the RBA added.
Dow Jones
ANZ, CBA, NAB, Westpac to cut dividends in 2018, Citi analysts predict
DateSeptember 21, 2015 - 4:38PM- 12 reading now
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Clancy Yeates
Banking reporter
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The four major banks will be pressured to cut their dividends in the next three years, Citi analysts predict, citing a likely deterioration in charges for bad loans that will force lenders to retain a bigger share of profits.
Analysts Craig Williams, Brendan Sproules and Andrew Tam argue a combination of tougher regulation and a slide in credit quality means banks' dividends must be "significantly lower" over the longer term.
While they say recent efforts by banks to raise capital have "bought time," they forecast all of the major banks will cut dividends in 2018.
Over the last two decades the share of profits paid out as dividends by Commonwealth Bank, National Australia Bank, Westpac and ANZ Bank has been on a "relentless upward journey," the note says.
Dividends payout ratios are likely heading towards 80 per cent next financial year.
However, the analysts argue this has left "very low" levels of capital on the banks' balance sheets, and they predict boards will eventually lower dividend payout ratios to a more "sustainable" level of between 60 per cent and 70 per cent.
"On a 3-year view, we expect all the major banks to cut dividends," the note said.
"Major banks' dividend payout ratios appear headed towards 80 per cent following the issue of a substantial number of new shares to fund higher mortgage risk weights," it said.
However, it said deteriorating credit quality would lead to a "dramatic increase in the amount of cash earnings that needs to be retained to support changes in balance sheet growth and risk".
Responding to rules designed to make banks safer, the major banks issued new stock to raise more than $15 billion from shareholders this year.
If banks continue to pay out the same dividends at a time of soft profit growth, this will push up dividend payout ratios, which the analysts say are heading towards 80 per cent in 2016.
They argue bank boards should tackle "unsustainably high" dividends directly, rather than shorter-term responses, such as slowing their loan growth or increasing take-up of dividend reinvestment plans.
The argument stands in contrast to UBS analyst Jonathan Mott's view that the $20 billion a year the major banks pay in dividends is reasonably safe if Australia's economic situation worsens slightly.
Bell Potter analyst TS Lim also said in a recent note that major bank dividends had only been cut on three occasions in the last 37 years, and a "benign" economic outlook suggested the sectors' dividends were sustainable.
Despite the Citi analysts' expectations of dividend cuts, they said the dividend yield on major bank shares still looked attractive even after a cut in the payout to shareholders.
Citi's analysts forecast National Australia Bank will keep full-year dividends flat at $1.98 a share for the next two financial years before cutting to $1.68 in 2018.
They forecast Commonwealth Bank would cut its dividend to $3.64 in 2018, compared with $4.20 in the last full year; they forecast Westpac's would be cut to $1.69 a share, compared with $1.82 in the last full year; and ANZ would cut its dividend to $1.64 a share in the 2018 financial year, compared with $1.78 in the last full-year.
Bank capital is an illusion
Alan Kohler
[Image: alan_kohler.png]
Editor-at-large, ABR
Melbourne
[b]The Murray Financial System Inquiry recommended raising bank capital in order to “reduce the probability of failure”.[/b]
But does capital actually do that? It may be used to protect depositors from loss once a bank has failed, but if real estate prices collapsed would the existence of 8 per cent of risk-weighted capital stop a bank from failing?
And would Westpac or one of the other big banks be allowed to fail anyway? Hardly: they are way too big to fail.
Imagine the scene outside a bank, after Australia’s property market has collapsed. “Wait,” goes the murmur down the line of depositors anxiously snaking up the street outside the banks’ doors. “It’s OK! The bank has 8 per cent risk-weighted capital. We’ll be fine.”
I don’t think so. The only thing that stops a run is a prime minister with a megaphone.
That’s what happened when Kevin Rudd guaranteed all deposits and wholesale term funding of all banks on October 12, 2008. It was the most effective megaphone in the history of banking — taxpayers stood behind every deposit. End of problem.
The Government still guarantees deposits up to $250,000.
So the question is this: if an Australian bank was on the brink of insolvency, and about to fail, would the Government really say: “OK, we’ll repay the deposits up to $250,000 but everyone else has to look to the capital. Sorry”?
Or would another press release come from the PM’s office like the one on October 12, 2008, upping the guarantee to include everything? I rather think it would be the latter.
It’s remotely possible that a smaller bank or credit union would be allowed to fail, so that the liquidator would have to call on shareholders’ money before selling or collecting on the assets, but it would definitely not happen with the big four. They were too big to fail in 2008, and they’re even bigger now.
In which case, in the real world, as opposed to the theoretical world of banking inquiries, capital is irrelevant.
It is too small to prevent a run, and anyway no government could risk letting it happen to a systemically important bank and would act first, and in any actual liquidation the capital would be gone in a trice once the liquidator started selling loans for cents in the dollar, and depositors would still lose plenty.
That’s especially true in the world of risk-weighted capital, where only 16 per cent, rising to 25 per cent, of real estate mortgages count against capital. That means the value of those mortgages only need to fall by about 2 per cent to chew through the capital.
So what is bank capital really for? Two things:
1. To provide the illusion of strength. Murray said Australia’s banks need to be in the “top quartile of internationally active banks when it comes to capital strength”. Really? Who says? And why quartile? Why not decile? Hell, why not be the banks with the most capital in the world?
2. To ‘tax’ shareholders and depositors for the government guarantee. The Abbott Government proposed an actual deposit levy but that was blocked by the Senate. Maybe Malcolm Turnbull will back his ability to negotiate one through, but in the meantime, increasing the capital requirement is a way of achieving the same thing. So far Westpac has announced that the tax is 20 basis points on deposits. The problem is that the Government doesn’t collect that money.
The argument between regulators and banks over capital is really an argument about taxation.
The truth is that big banks could have no capital at all because they are too big to fail, still.