Bank slashes dividends, offers bleak view of what’s ahead

NAB presents two possible scenarios on the country’s recovery.

nab economic outlook

National Australia Bank has released its half-year results almost a fortnight ahead of schedule, with profits hit hard as a result of the COVID-19 pandemic and dividends slashed by two-thirds.

It has also offered two possible scenarios on the country’s recovery – one described by The Age senior business analyst as severe and the other as horrific.

With other major banks yet to reveal their positions, market analysts say any holdout over slashing dividends risks stymying the stock market’s recovery.

NAB said its cash profit for the six months to March was $1.44 billion, a drop of 52 per cent compared with the same half last year. The result did, however, include a $1.61 billion credit impairment charge, which more than doubled as a result of the pandemic.

The bank announced it would pay an interim dividend of 30 cents a share, down from 83 cents, and was planning to raise $3.5 billion in equity through an institutional placement and share purchase plan.

NAB chief executive Ross McEwan said the measures would bolster the bank’s footing so it could weather the economic fallout of the coronavirus crisis.

“We entered this challenging period in a robust position, with capital, funding and liquidity significantly strengthened over recent years,” Mr McEwan said.

“However, given the uncertain outlook, we have taken proactive steps to further strengthen our balance sheet.”

The decision was a balancing act, he said.

“(About) 48 per cent of shareholders do rely on a dividend ... at the time of a placement you don't want the share price dragged down,” he said.

The Australian Prudential Regulation Authority (APRA) had warned major banks to “seriously consider” deferring dividend payments until the economic forecast became clearer.

APRA chairman Wayne Byres wrote to boards earlier this month, calling for restraint in dividends, buybacks and cash bonuses for executives.

He wrote that if they did pay a dividend, it must first be cleared by the regulator and must be at a level that was “materially reduced”.

“During this period, APRA expects that ADIs [authorised deposit-taking institutions] and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.

“However, where a board is confident they are able to approve a dividend before this, on the basis of robust stress-testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level.”

However, considering about one million retirees rely on banking shares as a leading source of fixed income, the APRA warning drew a mixed response.

Reserve Bank governor Philip Lowe said that banks should still be able to deliver dividends to shareholders, because the major banks were “well capitalised” compared to other businesses.

Saxo Capital Markets market strategist Eleanor Creagh told The New Daily that uncertainty over future dividend cuts – whether similar to NAB’s or to zero – weighed down investor sentiment.

“The big four banks are the heavy weight on our index and on our markets,” Ms Creagh said.

“And while there’s so much uncertainty with respect to dividend payments, the key driving engine behind pushing the index higher up from [its March collapse] is stalled.”

Ms Creagh added that the Australian share market had been high yielding for three decades as “banks bent over backwards to ensure major payouts for their shareholders”.

“It’s a warning shot for investors, who may have been complacent in terms of seeking out this yield, because those payout ratios at the end of the day may not be as sustainable as people thought they were.

“And that’s not just the banks – it’s potentially across the broader market.

“If you were to take the bigger picture into account, while it may hurt the individual, you would rather the collective action of having a well-capitalised balance sheet and a buffer to withstand this period of economic uncertainty.”

ANZ Bank and Westpac are due to deliver half-year results over the next week, with speculation they will follow suit on dividends.

The Age and Sydney Morning Herald senior business columnist Stephen Bartholomeusz said that so far, the actions the banks had taken to support their customers had helped to restore reputations and brands ravaged by the financial services royal commission.

He added: “They are yet to properly confront, however, the difficult and inevitably controversial moment when they begin performing triage on their loan portfolios, deciding which businesses and individuals emerge intact and retain their support when the crisis clears, and which don’t.”

NAB has offered two views on the potential economic impact of the lockdown – a ‘V-shaped’ recovery, where the recession is relatively short-lived and the economy rebounds quite quickly and strongly, and a worst-case, or ‘U-shaped’ recovery, where it does neither.

The Age reports that the base case is for a three per cent shrinkage in the economy this year followed 3.4 per cent growth in 2021. Unemployment would peak at 11.6 per cent before falling back to 7.3 per cent next year. House prices would fall 10 per cent this year but rise 2.6 per cent in 2021.

The “severe downside” scenario would still see GDP fall three per cent this year but it would shrink again, by 2.5 per cent, next year and the economy emerge from the recession in 2022 with weak two per cent growth.

Unemployment would be lower this year, at 7.4 per cent, than in the base case but would be 10 per cent in 2021 and 10.4 per cent in 2022. House prices would fall 20.9 per cent this year and another 11.8 per cent in 2021 before 2.5 per cent growth in 2022.

Do you rely on dividends for retirement income? Are you alarmed by NAB’s economic scenarios?

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    COMMENTS

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    mike
    28th Apr 2020
    10:16am
    Well our banks have saved Australia from the previous global recession , but now our Gov wants to destroy our banks and also the self funded retirees. Firstly the banks were forced to hugely increase cash kept in reserve, which is expensive and provides no income to investors. Then these multi billion dollar fines for alleged bank misconduct. Who is affected. NOT THE CEOs who still keep their bonuses, but the SELF FUNDED RETIREES who depend on bank dividends for their income. Now the pandemic has hit the banks. NO, its an attack on self funded retirees, Shorten tried very hard to destroy them with the franking credid changes. He eve said, Stuff the self funded retirees. No, our self funded retirees are too comfortable, and need to be destroyed and one way is to destroy the banks. Remember, Stalin destroyed a whole generation of people to bring in communism. He also destroyed the Ukraine, caused 50 million deaths, but he achieved his aim and brought in communism. Today, our banks , and our retirees are too strong and need to be brought down. The world bank has decreed this. So, multi billion dollare fines are just the start.
    Anonymous
    28th Apr 2020
    10:57am
    Why haven't you got cash to pick up bargains such as NAB?
    AutumnOz
    28th Apr 2020
    11:35am
    Mike, you mean Australian banks saved us during the 2009 recession, unfortunately those Australian banks have now been taken over by multi-national banks who kept the names, and are only interested in their own dividends and not very concerned about the dividends of shareholders.
    Sundays
    28th Apr 2020
    12:49pm
    As shareholders you supported the Boards to approve obscene executive salaries because you were happy with the Dividends to Shareholders. You turned a blind eye to lack of customer focus and ongoing bank closures. Did you really think it was sustainable in the long term?
    maelcolium
    28th Apr 2020
    3:58pm
    The banks didn't save Australia from the last global recession. The banks had to be bailed out by the Government because they couldn't pay their overseas loans when they fell due. They were all one day away from being bankrupt before the Government came to their aid. They then proceeded to pay their executives huge bonuses and investors obscene dividends. The Government had to stand as guarantor for each domestic deposit account for $500,000, later reduced to $250,000 which is still in place to this day. The Royal Commission found that the major banks without exception acted like robber barons for at least the last decade and they were fined accordingly. Reserve requirement are managed by the Reserve Bank and have nothing to do with lending or borrowing, they are there to cater for the payments system.

    Those are the facts Mike, not the fairy tales you've constructed which is just displaying your ignorance. You are talking bullshit.
    Rae
    28th Apr 2020
    10:20am
    As long as APRA and the banks don't dither around then those retirees losing income and asset value can apply to Centrelink for pensions. Centrelink is a overstretched and needs extra staff and to fix the dismal IT system and all the faults data entry seems to create.

    APRA only cares about saving the banking system.

    28th Apr 2020
    10:56am
    Gee I love collecting these bargains. If you had done so in the GFC you would be laughing today and this is not near as bad as the GFC.
    Sundays
    28th Apr 2020
    12:52pm
    Really? Westpac shares are lower now than they were 17 years ago. Only laughing if you had sold when the shares hit their peak
    Anonymous
    28th Apr 2020
    2:05pm
    Of course you would have sold the extra ones you bought and now be back to a key holding just for the dividend and franking credits as it's better than holding cash.
    Misty
    28th Apr 2020
    11:29am
    So you like to gloat Retiring Well?, well people would think more of you if you spared a thought for those people who are not as well off as you seem to be, and cannot afford to do as you suggest, buying up bank shares etc.
    80 plus
    28th Apr 2020
    11:30am
    mike you state "Shorten tried very hard to destroy them with the franking credit changes", And I Thought this was a misinformation scare tactic by the rabid right and not true.
    Sceptic
    28th Apr 2020
    12:04pm
    Do you live in a bubble 80 plus? It was part of Shorten's programme for the last election.
    Anonymous
    28th Apr 2020
    2:46pm
    Yes Sceptic you are correct there were a lot of things that did Shorten including his arrogance but I think the franking Credit removal did him the most damage.
    Sundays
    28th Apr 2020
    12:37pm
    The warnings were very clear not to invest solely in Australian Shares purely for the Dvidends and Franking Credits in case of a downturn. I am not surprised.
    Anonymous
    28th Apr 2020
    1:50pm
    We will soon see some real bargains in Australian shares which will not only have good dividends but will be fully franked as well. Oil will be a real winner out of this.
    Anonymous
    28th Apr 2020
    2:47pm
    I am guessing you don't have too many shares Sunday?


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