The Reserve Bank’s rate cut on Tuesday and bets that another will follow in the next month or so have seen questions again raised over the share prices and sustainability of bank dividends at their current levels.
That realisation saw bank shares sold off yesterday and analysts released new forecasts. Many forecast margin compression, weaker earnings, and pressure on dividends and costs.
The financial sector of the ASX slumped 2.81% yesterday compared with the ASX 200’s smaller (but still nasty) fall of 1.7% or 110 points.
Comm Bank shares fell 2.5% to $777.11, NAB shares were off 3.7% at $23.24, ANZ shares fell 3.3% to $23.21 and ANZ shares lost 3.1% to 22.23.
Macquarie analysts described the cut as ‘’a material hit to the existing weak earnings outlook for banks.”
In a client note, yesterday Macquarie Wealth Management said the shift in rates will see an estimated 5% hit to earnings over three financial years – or 9% in Bendigo and Adelaide Bank’s case.
That’s because, as we saw on Tuesday after the RBA cut, the banks will be forced to pass the next cut on as well because of political reasons.
“Following the October 2019 rate cut, banks suggested that a full pass-through of additional rate cuts will not be feasible,’’ Macquarie Wealth’s analysts wrote.
“However, it appears that in the current environment, banks lacked the required political capital to reprice their back-books and passed the entire rate reduction to customers. Without repricing benefits, we expect earnings and returns to continue to decline, diminishing banks’ ability to sustain dividends.”
“While bad for short-term earnings, we were increasingly concerned that banks faced the risk of punitive measures (i.e. a higher bank levy or additional regulation in mortgage pricing) if they were to continue to reprice back-book mortgages”.
JP Morgan is also bearish on the banking sector after it was pressured into passing on the full rate cut.
“We estimate the full pass-through of a 25 basis point rate cut reduces major bank net profit by about 3 percent to 4 percent, with Bendigo and Adelaide Bank most exposed at about 7 percent,’’ JP Morgan analysts wrote in a note to clients.
“Rate cuts also make it increasingly difficult to manage deposit spreads effectively (which is necessary to partly offset ongoing headwinds). These developments could put further pressure on payout ratios, raising the prospect of more dividend cuts”.
JP Morgan has reduced its price target for ANZ from $26.80 to $25.25, for Westpac from $25 to $23.40, for National Australia Bank from $29.80 to $28, and for Commonwealth Bank from $78.20 down to $74.20.
NAB shares hit a new 12 month low yesterday of $23.26.
JP Morgan is forecasting a cut in Westpac shares from 76 cents a share a half-year down to 74 cents but believes the Commonwealth’s huge $4.31 full year dividends will not be cut due to a strong capital position.
Profit forecasts have also been reduced by an average of 1.4 percent for 2019-20 and an average of 4.5% by 2021-22.
NAB is most likely to be hit by the coronavirus given its high exposure to small business lending, and JP Morgan has reduced a Commonwealth Bank buy-back assumption from $7 billion down to $6 billion and spread that from June 2020 to June 2021.
