The Commonwealth Bank of Australia (ASX: CBA) share price will be on watch as the market is expecting a big increase in dividends next week.
The CBA will be the first to give an indication whether investors' hopes of an ASX bank sector revival have been misplaced.
Expectations are high and that's why the sector outperformed the S&P/ASX 200 Index (Index:^AXJO) recently.
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CBA's potential 50% dividend uplift
The average analyst forecast for CBA's upcoming interim dividend stands at $1.47 a share, according to the Australian Financial Review.
That's a 50% increase over the bank's greatly reduced final dividend of 98 cents that it paid last September.
That may not sound like a lot to shareholders as that equates to a modest yield of 3.4% (if you extrapolated the half-year payout). But this would rise to 4.8% if you can collect the franking credit.
More dividend growth for CBA
What's more, CBA typically pays a bigger final dividend. In the pre-COVID-19 years, the bank's final payment is 15.5% bigger than its half year dividend.
Also, if you believe the experts, dividends are set to continue rising as the sector continues to recover from the effects of the pandemic.
There's lots of room for dividends to recover too. Even if CBA lifts its dividend to $1.47, the bank used to pay an interim dividend of $2 a pop.
Banks' V-shape earnings recovery
There are reasons to feel optimistic about the banking recovery too. "Frozen loans" on CBA's balance sheet have plunged by 80% to $51 billion at the end of 2020. These loans are tied to borrowers who have experienced hardship during the pandemic and have paused repayments.
The big drop in troubled loans means the bank can lower its provisioning. Every dollar it removes from provisions flow straight to its bottom line.
Let's not forget that loan applications are up strongly. The value of new home loans approved in November hit a record high of $24 billion.
Excess cash for dividends and share buyback
The double tailwind could put CBA's CET1 ratio at around 12%. This is 1.5 percentage points above what the banking regulator requires banks to hold and the excess cash will be useful in lifting dividends or funding other forms of capital return.
But analysts are split on how likely capital returns might be this calendar year. The bank may not want to raise the ire of the banking regulators by lifting dividends and funding a share buyback when the economy hasn't fully recovered by COVID.
Foolish takeaway
CBA fortunes aren't unique. The Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price will benefit from these trends too.
CBA is the only big bank with a June financial year end. The others will report their results and dividends later as their financial year end is in September.
