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Dividends Under Pressure: Australia’s Major Banks at a Crossroads
Australia’s leading banks are facing a crucial moment regarding dividend sustainability, with their payout ratios nearing or surpassing desired thresholds, leading to uncertainty about the future of their generous returns to shareholders.
Rapid Dividend Growth Challenges Limits
Over the past two years, ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB), and Westpac (WBC) have exhibited remarkable dividend growth, averaging a 17% increase from FY22 to FY24. This spike has resulted in a rise in average payout ratios by 5 percentage points, reaching approximately 75%.
Forecasts for FY25, as per Morgan Stanley analysts, suggest that payout ratios may breach the upper limits of each bank’s target range. ANZ is anticipated to peak at 73% against its target of 60-65%, while CBA could hit 79%, eclipsing its 70-80% range. Similarly, NAB and WBC are projected to reach payout ratios of 76%, exceeding their 65-75% targets.
Historical Context Raises Concerns
The current scenario draws parallels to the pre-COVID era, where elevated payout ratios led to increased worries among investors. From 2016 to 2018, NAB and WBC maintained ratios exceeding 80% before slashing dividends in 2019, while ANZ opted for an earlier reduction in 2016.
Despite these historical warnings, Morgan Stanley’s base case anticipates no dividend cuts from the major banks, predicting that boards will uphold current dividend levels, even if payout ratios temporarily surpass target ranges, as long as their capital buffers remain sufficient.
Stable Dividend Projections
According to Morgan Stanley’s estimates, three out of the four major banks are likely to stabilise their dividends over an extended period. ANZ and WBC are set to maintain half-yearly dividends at 83 cents and 76 cents, respectively, until mid-2027. NAB is expected to keep its dividend steady at 85 cents until early 2026.
CBA, however, is predicted to see the most substantial dividend growth among the Big Four through 2027. It’s noteworthy that WBC has yet to recover its dividend to pre-pandemic levels.
| DPS (cents) | FY24 | FY25e | FY26e | FY27e |
|---|---|---|---|---|
| ANZ | 166 | 166 | 166 | 166 |
| CBA | 465 | 485 | 515 | 555 |
| NAB | 169 | 170 | 171 | 177 |
| WBC | 151 | 152 | 152 | 153 |
Source: Morgan Stanley
| Dividend Yield | FY24 | FY25e | FY26e | FY27e |
|---|---|---|---|---|
| ANZ | 5.6% | 5.6% | 5.6% | 5.6% |
| CBA | 2.6% | 2.7% | 2.9% | 3.1% |
| NAB | 4.4% | 4.4% | 4.4% | 4.6% |
| WBC | 4.6% | 4.6% | 4.6% | 4.6% |
Source: Morgan Stanley
Risks Highlighted in Current Scenarios
Although the base case doesn’t anticipate dividend cuts, Morgan Stanley’s analysis reveals potential weaknesses if economic conditions worsen. Their scenario assessments consider the effects of reduced net interest margins and increased loan defaults, which could push payout ratios into precarious positions.
The analysis indicates ANZ is at the highest risk of reducing dividends, with WBC following closely. This evaluation is based on their current payout ratios and financial flexibility relative to competitors.
Market Repercussions
Even without any actual dividend cuts, Morgan Stanley warns that concerns over dividend sustainability may pressure trading multiples, thereby impacting the share prices of banks most strained by their payout ratios. Although current capital levels appear capable of sustaining existing dividends, a significant downturn in operating conditions could compel bank boards to reconsider their strategies for returns to shareholders.
Conclusion
As Australia’s major banks navigate through rising dividend payouts and increasing scrutiny over sustainability, they stand at a pivotal point. The path forward will demand careful assessment, balancing shareholder expectations against operational realities. The looming question of dividend viability will remain critical in shaping investor sentiment and market dynamics in the coming years.
