Christmas may be well and truly over but t'is the (reporting) season to be giving with some experts predicting a record year for dividends and capital returns – that is unless you are a bank.
While shares in our big four banks have found renewed support since the start of the year, they are still underperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with the Commonwealth Bank of Australia (ASX: CBA) share price the best of the worst as it dipped 3% in the last 12 months.
This is followed by the Australia and New Zealand Banking Group (ASX: ANZ) share price, Westpac Banking Corp (ASX: WBC) share price and National Australia Bank Ltd. (ASX: NAB) share price.
Rich man, poor man
Banks are under earnings pressure and that's crimped their ability to lift dividends or undertake any meaningful capital returns.
In contrast, the mining sector is flushed with cash and several have paid special dividends and/or recently undertook billion-dollar plus share buy backs. Rio Tinto Limited (ASX: RIO) was the latest to announce a special dividend, which should give the RIO share price a nice boost this morning.
But the coffers of our largest banking institutions could get a big cash injection on speculation that they may sell their New Zealand businesses as bank regulators across the Tasman are considering lifting the capital requirements for the group to better protect the New Zealand economy from shocks.
How banks could get more cash
The proposal is more onerous than what is required in Australia and could force our banks to put aside billions more to meet the proposed capital requirement. The new rules have not been implemented and are at the consultation stage.
But if it comes to pass, the new requirement could lower the big four's Australian capital buffer as cash will have to be taken out of the Australian operations to top up their New Zealand subsidiaries.
This is why some analysts quoted in the Australian Financial Review are suggesting that the big four are better off divesting these assets.
The move will not only free the them from the tighter capital requirements but could potentially add a significant amount of cash to their balance sheets.
Perhaps more significantly, it may elevate concerns about a dividend cut with several analysts suggesting that NAB is the most vulnerable. What's more, NAB is the second most exposed bank to New Zealand with 15.5% of its earnings coming from that market.
Such a sigificant divestment program could also prove to be a catalyst for a sector re-rating. The extra cash would be handy to help the banks ride out this rough patch with falling residential prices, greater scrutiny on lending practices and nervous consumers conspiring to drag on their earnings through to 2020.
It's food for thought!
