Up to one million older Australians will have their retirement incomes slashed as Australia’s second largest bank scrapped its first-half dividend payments.
Westpac told shareholders on Tuesday it would press pause on dividends until at least November to account for lower profit margins and a forecast rise in bad debts.
Despite the bank enjoying $1.32 billion in unaudited cash earnings over the past quarter, the bank has decided to err on the safe side and suspend payouts due to the unpredictability of COVID-19 outbreaks and their impact.
“We have maintained our strong balance sheet and increased provisions for bad debts to support our prudent approach to managing impairments,” said Westpac chief Peter King, adding that the bank’s priority was “to remain strong so we can continue supporting customers through this challenging period”.
The announcement follows Westpac’s decision to cut itsinterim dividend in May.
Last week, CommBank cut its final dividend from $2.31 to 98 cents, in what was described as a show of strength at how well the bank is weathering the pandemic.
CommBank chief Matt Comyn said the payout “represents a cautious approach to capital management and dividends as we head into a period of economic uncertainty”.
“We are fortunate insofar that we entered this in a very strong position,” he told The Australian Financial Review.
“We feel like we’ve never had a stronger balance sheet … and we feel like we’re well placed for a range of economic scenarios.”
ANZ has announced in its trading update that it would pay an interim dividend of 25 cents per share, fully franked.
ANZ is also playing a cautious hand as it copes with losses from deferred home loans, debt repayment holidays and the related uncertainty from lockdowns.
Still, the bank remains cautiously optimistic about its latest results.
“You only need to look at the reintroduction of community lockdowns in Victoria and Auckland to realise we all still have a way to go before this virus is behind us,” said ANZ chief executive Shayne Elliott.
So while it is not bad news from all big banks, Westpac’s move will slash the incomes for around one million retirees who rely on bank dividends as a main source of income.
National Seniors Australia chief advocate Ian Henschke said the federal government now more than ever needed to review the interest rate on the Pension Loans Scheme.
“There are people at this point in time [due to pandemic-related losses] who would be needing to draw on money when they have little to no other source,” he told The New Daily.
“Self-funded retirees carry a lot of the risk and they’ve been forced into investments such as the sharemarket by the high deeming rates because they simply can’t get the return from savings accounts and term deposits.”
Mr Henschke also said this was the perfect case for a universal pension payment to be considered, as such a system would provide more assurance for older people during economic downturns.
As for retirees with SMSFs, Centaur Financial Services director Hugh Robertson said this downturn would deliver a harsh lesson for retirees who most relied on dividend payouts, especially those without diversified portfolios.
“Retirees were [tolerating] the volatility of these unsustainable payouts on the basis they were getting such a good yield, when they should have been pursuing a yield and capital approach,” said Mr Robertson.
“It’s really one of the canary in the coal mines when you say a retiree needs more of a structure to generate income so they can better control their outcomes and be less exposed to risks from announcements like Westpac’s.”
And for those heavily invested in property, it could get even worse for retirees, with falls of up to 12 per cent in property values still a “reasonable assumption”.
Considering the financial performance of the banks so closely tied to the property market, this could negatively affect retiree incomes even further, said Mr Robertson.
And with two major banks slashing their savings rates even further, Australians young and old with significant savings will experience lower interest returns, according to the latest Canstar data.
CommBank cut its introductory rate on its NetBank Saver account by 0.05 per cent and slashed the bonus rate on its GoalSaver account by 0.05 per cent for balances of $50,000 or more.
NAB also cut its savings rate on term deposits by between 0.05 per cent and 0.15 per cent.
This means that around 50 per cent of savings accounts and 80 per cent of term deposits now have a total savings rate of less than 1 per cent – particularly bad news for retirees who have already been hit by reduced incomes.
“The income from a ‘low-risk’ term deposit cannot meet their cost of living, sending their capital on a downward spiral,” Martin Currie investment team stated.
“This is a dire situation.”
However, there is still hope, says Canstar editor-at-large Effie Zahos.
“Banks are seeing their margins squeezed, some banks aren’t paying dividends and others are trying to offer higher rates in a low rate environment,” she said.
“Anyone with a savings goal or those wanting to stash away emergency funds need to be prepared to play leapfrog and jump around to chase the better rates.”
Are you surprised by Westpac’s move to scrap dividend payments? What are you doing to mitigate any loss of income?
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