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

The Pak Banker - - COMPANIES/BOSS -

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.

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