Australia's Fat Bank payouts likely to come to an end

Some of the world's fattest bank dividends are at risk as Australia's four dominant banks, which together raised a record amount of equity capital last year, come under pressure to add more amid a potential rise in bad debts.

Commonwealth Bank of Australia, National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Westpac Banking Corp.-- the nation's four biggest lenders -- may need to add to the A$20 billion ($14 billion) they raised last year so that they count among the world's safest banks, the regulator says. The banks are disputing that notion, saying their beefed-up buffers are sufficient.

At stake in the debate is the dividend payout ratio the group offers, at an average 78 percent the highest among banks worldwide valued at more than $10 billion, data compiled by Bloomberg show. This attracted global investors during a period of nearzero interest rates.

"There's certainly more capital raisings to come from the banks this year," Sean Fenton, who helps oversee $1.7 billion as portfolio manager at Sydney-based Tribeca Investment Partners, said. "While the lenders will try to maintain the illusion of dividends and issue more stock along the way to boost capital, increasing capital and increasing bad debts at the same time can put pressure on dividends."

This month, Goldman Sachs Group Inc. predicted "a gradual decline" in the payout ratio for the banks, while Morgan Stanley forecast a dividend cut by ANZ as the lender comes under pressure to boost capital. Lowering dividends would allow banks to rely less on selling new shares to beef up their buffers. The Australian Prudential Regulatory Authority is trying to shore up the lenders against a potential surge in mortgage losses and to ensure compliance with global capital regulation. After the banks raised their capital ratios by about 80 basis points last year, the increase only "narrowed the gap" to the world's safest banks, Byres said in November.

Banks are facing an environment of "heightened, but manageable" risks, specifically in housing, the Reserve Bank of Australia said in its semiannual financial stability review in October. The ratio of non-performing assets to total loans was 0.9 percent as of June, down from a peak of 1.9 percent in mid-2010, the central bank said. Still, the lenders have started setting aside more for bad debts as the economy slows.

The banks will need to add another A$20 billion in capital in the next two years, according to the mean estimate of four analysts surveyed by Bloomberg, putting a drag on stock prices and dividends.

The regulator said in July the nation's four biggest lenders had to boost their capital adequacy by at least 200 basis points to get into the world's safest club. The assessment was based on a review of capital levels of 98 lenders including Wells Fargo & Co. and HSBC Holdings Plc. The world's most capitalized banks include Nordea Bank AB and UBS Group AG according to a 2015 study by Westpac.

Westpac's common equity tier 1 level on an internationally comparable basis was 14.2 percent as of Sept. 30, placing it among the world's best capitalized lenders, Chief Executive Officer Brian Hartzer said in November. At National Australia, CEO Andrew Thorburn, put the ratio at 13.5 percent. Mike Smith, who retired Dec. 31 as head of ANZ, estimated the measure at 13.2 percent.

"We believe we have the right level of capital for today," Shayne Elliott, Smith's successor, said Wednesday in a telephone interview. "Possibly, we will need to hold more capital in the future."

Capital levels in the medium to long term are "moving and increasing," he said. Banks should be able to add capital through retained earnings and dividend reinvestment plans, Elliott said.

The regulator and bank chiefs differ in their assumptions for the timing of capital rules, likely minimum risk weights or the capital required to guard against loan losses, according to T. S Lim, a Sydney-based analyst at Bell Potter Securities. A capital deficit of A$10 billion to A$15 billion over two years can be met through retained earnings and dividend reinvestment plans where investors swap all or part of their dividends for new shares, Lim said. A bigger shortfall will require fresh equity raising and dividend cuts, according to CLSA Ltd. and Citigroup. Australia's major banks will eventually need to target a common equity tier 1 ratio that is about 2 percentage points above current levels, Brian Johnson, a Sydney-based analyst at CLSA, said in a Jan. 12 investor note.

Those lenders posted a record A$30 billion in combined profit in their latest fiscal years. Their shares have lost a quarter of their value since peaking in March, caught in the turbulence caused by a weakening outlook for China and capital requirements.

Craig Williams, a Sydney-based analyst at Citigroup, projects dividends to remain unchanged for the group through fiscal year 2017 and decline by 15 percent to 18 percent in 2018. He cited increased capital demands among reasons for cutting his target prices on the lenders by an average of 4 percent. Spokesmen at Commonwealth Bank, National Australia Bank Ltd. and Westpac declined to comment on capital or dividends.