A leading portfolio manager has said that ASX banks could slash dividends by more than half, which would be a blow to millions of retirees.
Portfolio manager Dermot Ryan from AMP Limited (ASX: AMP) said that when banks report their earnings in May they may cut their dividends by over 50%, according to reporting by the AFR.
Commonwealth Bank of Australia (ASX: CBA) has already reported its result in the February 2020 reporting season. It's the other banks of Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) which could cut dividends.
There are various reasons why it's likely that ASX banks could slash dividends because of the coronavirus.
The latest, and perhaps biggest, reason is that the Australian Prudential Regulation Authority (APRA) last week said banks should be prudent with their capital. APRA said it expects the banks to cut their dividends.
The AFR quoted Mr Ryan saying: "Keeping precious working capital is key across all sectors and prudent as companies move to preserve cash in these lean times. It is only reasonable that dividends are crimped to make sure banks have surplus capital to lend into the economy, particularly as credit spreads widen."
He went on to say that bank dividends may not bounce back quickly because banks have to provision in advance for losses.
Other reasons ASX banks could slash dividends
APRA isn't the only reason that ASX banks may have to cut dividends. The profits generated in New Zealand are currently being quarantined by the Reserve Bank of New Zealand (RBNZ) so that the banking system remains strong.
Banks also face the simple face that their net interest margins (NIMs) are probably going to fall further with the RBA interest rate now at just 0.25%.
I don't believe that banks are the right long-term choice for growth investors or income investors, even if they look cheaper.
Instead, I'd much rather put my investing money towards these top ASX shares.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.
