The S&P/ASX 200 Index (ASX: XJO) has opened the day notably lower on Wednesday following heavy declines by National Australia Bank Ltd (ASX: NAB) and the rest of the big four banks.
At the time of writing the NAB share price is down over 5% to $15.22.
Why is the NAB share price sinking lower?
Investors have been selling the banks today for a couple of reasons.
The first is news that Fitch Ratings has downgraded the four major Australian banks' credit ratings to A+ from AA-. In addition, the ratings agency revealed that its outlook on the Long-Term IDR is negative.
The second is the revelation that APRA has contacted all authorised deposit-taking institutions (ADIs) and insurers regarding their capital management.
The prudential regulator notes that the banks and insurers are playing a critical role in supporting Australian households, businesses, and the broader economy during this period of significant disruption caused by COVID-19.
As a result, it has requested that dividend payments be limited in the coming months. And where dividends are approved, this should only be on the basis of robust stress testing results and at a materially reduced level.
What now?
This morning NAB responded to the request, advising that it will take APRA's guidance into account when it considers its FY 2020 interim dividend.
This has sparked fears that its dividends could be materially reduced or even deferred in full. In fact, the latter was the case this morning when Bank of Queensland Limited (ASX: BOQ) released its half year results. It has deferred its interim dividend until the market outlook is clearer.
Though, it is worth noting that Goldman Sachs still expects the banks to pay dividends.
In a note it commented: "Despite the material deterioration in the outlook for our earnings, on our current forecasts, we expect all major bank CET1 ratios to be above APRA's unquestionably strong benchmark of 10.5% by 2H22E. We therefore remain comfortable with our DPS forecasts, at this stage."
Goldman Sachs has forecast a year on year dividend cut of 19% by NAB in FY 2020. This equates to a dividend of ~$1.34 per share. Which based on its current share price, represents a fully franked yield of 8.8%.
In light of this, it is no surprise to learn that Goldman Sachs has a conviction buy rating and $17.76 price target on its shares.
Whilst I agree with Goldman and think NAB would be a great option at the current level, my preference remains Commonwealth Bank of Australia (ASX: CBA). I think it is the highest quality bank and best-placed to ride out the COVID-19 storm.
