Why it's a good thing that banks are cutting dividends

I think it's a good thing that banks like National Australia Bank Ltd (ASX:NAB) are cutting 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

I believe it's a good thing that banks like National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are cutting their dividends.

Obviously, it's not helpful for retirees who rely on the dividend income paid every six months. I have been warning for some time that the big banks may have to cut their dividends.

This morning we saw a dividend cut of 16% from NAB. It certainly wasn't a surprise because the half-year dividend was also cut by that amount.

One of the main reasons that NAB and Westpac cut dividends is because they have to meet the 'unquestionably strong' capital ratio set by APRA. The deadline for this is just around the corner and the banks are simultaneously paying large amounts of customer remediation.

But there's also the argument that banks need to retain more of their profits so that they can re-invest for growth.

Banks earn most of their profit from the net interest margin generated. But the net interest margin (NIM) is declining with these record low interest rates. The other sources of bank earnings are coming under pressure from a variety of places including technology companies.

If banks like NAB and Westpac are going to have a chance of growing profit they need to put money into new growth areas.

Lending for mortgages is becoming more like a commodity product, which is partly when bank NIMs have been slowly falling over the long-term from more competition. I think they need earnings diversification.

Whilst Telstra Corporation Ltd's (ASX: TLS) dividend cut was also painful, it was necessary for the telco to invest more for growth rather than pay out all of its earnings every year.

Australia and New Zealand Banking Group (ASX: ANZ) didn't give shareholders a dividend cut, they just saw a franking credit reduction. But that shouldn't be surprising considering more of its profit is being generated overseas which doesn't create franking credits.

Foolish takeaway

Keeping some profit is necessary to grow future profits. It's not as though the banks don't have high yields any more. Based on the new dividends, NAB has a grossed-up dividend yield of 8.3% and Westpac has a grossed-up dividend yield of 8.3% as well.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

More on Bank Shares

A businessman presents a company annual report in front of a group seated at a table
Bank Shares

Earnings season predictions: Macquarie weighs in on the big 4 banks

What are the broker's predictions?

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Major CBA investor reveals why he's all in

This investor described one major reason driving his investment in CBA shares.

Read more »

Young investor sits at desk looking happy after discovering Westpac's dividend reinvestment plan
Bank Shares

Invested $10,000 in Westpac shares 2 years ago? Guess how much you've already banked!

Atop their regular dividend payments, Westpac shares have enjoyed a strong two-year run.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Bank Shares

Buying CBA stock today? Here's the dividend yield you'll get

CBA's yield right now might surprise you.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
Bank Shares

How much would the ASX 200 fall if CBA shares returned to 'fair value'?

CBA shares account for 12% of the ASX 200.

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Dividend Investing

How are these passive income investors earning a 7.5% dividend yield on their surging CBA shares?

CBA shares are proving more lucrative for some passive income investors than others.

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank.
Bank Shares

$10,000 invested in CBA shares in FY25 is now

Let's see whether it was a successful 12 months for bank investors in the last financial year.

Read more »

Woman with spyglass looking toward ocean at sunset.
Bank Shares

What could happen to the big 4 banks in FY26?

What’s in store for the big four banks over the next 12 months?

Read more »