When the banks could cut their dividends to zero

Only small falls in capital could see the big four banks slash their dividends

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

According to a new report by the Australian Financial Review (AFR) it seems the banking regulator will actually force the banks to hold onto more of their earnings if capital ratios fall below a certain point.

And it will only take modest falls in equity to see the Australian Prudential Regulation Authority (APRA) require the banks to stop paying dividends, distributions on hybrid securities and staff bonuses.

As the AFR reports, if capital ratios fall below 8%, APRA will restrict 40% of major banks' earnings from being used as dividends. Commonwealth Bank of Australia (ASX: CBA) current payout ratio is 76.5%.

Australia and New Zealand Banking Group (ASX: ANZ) CEO Shayne Elliot has already flagged lower dividends for its shareholders, down from the current range of 65% to 70% to 60% to 65% over the longer term.

National Australia Bank Ltd (ASX: NAB) had a payout ratio of 78.8% during the first half, while Westpac Banking Corp (ASX: WBC) reported a payout ratio of around 80% in the first half of the 2016 financial year.

It's fairly clear to most analysts that the banks had reached their peak payout ratios already and needed to trim them back anyway.

But should the economy head into a recession and banks' capital ratios fall below 5.375%, a formal stop on 100% of all payments to equity and hybrid securities kicks in. Banks typically experience declining capital ratios during recessions – hence the risk. During the last recession in 1991, both ANZ and Westpac reported losses and slashed their dividends.

That means zero dividends for shareholders, with the banks using the cash flow to shore up their balance sheets. And given the similarities between the big four and their exposure to Australia's economy, investors could see all four banks cut back their payout ratios drastically or stop paying dividends.

Foolish takeaway

We've warned for some time that Australian retail investors need to diversify away from the big four banks. That doesn't necessarily mean selling out completely – but it does mean having other sources of dividends.

You can't say you haven't been warned.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »