This was published 7 years ago
Banks can maintain dividends despite headwinds: AFIC
By Clancy Yeates
Bank shareholders can look forward to strong dividends this year despites the pressures on the sector from lacklustre credit growth and stiff competition.
That's the view of one of Australia's largest bank investors, the Australian Foundation Investment Company (AFIC) , which holds more than $1.7 billion worth of shares in Commonwealth Bank, Westpac, National Australia Bank, and ANZ Bank.
The comments on Monday, which came as AFIC's half-year profits dipped 19 per cent to $118 million, are the latest in the long-running market debate about the sustainability of banks' hefty dividend payouts.
After the rally in shares during late 2016, AFIC's managing director Ross Barker also said the fund viewed Australian shares as "fully valued," and predicted a Trump presidency would lead to a volatile year for equity investors.
AFIC managing director Ross Barker is not anticipating dividend cuts from the banks.
Mr Barker said the fund was "comfortable" with bank shares, which have risen by almost a fifth in the last year, but not looking to buy more banks at current prices.
"We think that there are quite a few headwinds in front of them. We are at a low point in the bad debts cycle, so at some point that will start to tick up and that will affect profits," Mr Barker said in an interview.
"The household sector in Australia is pretty fully geared, so we're not expecting a lot of growth in the mortgage side of their businesses, and even the business part of it.. there hasn't been a lot of growth in business lending either."
Profit growth issue
Mr Barker said it would not surprise him if banks continued to use their dividend reinvestment plans to raise extra capital, but he was not anticipating cuts in dividends.
"There are ways of dealing with capital rules. To us the real issue with dividends is profit growth and ability to maintain profit. The key issue there is do bad debts tick up? There might be a little bit of a tick up, but we're not expecting a lot of that," he said.
AFIC, which invests in a range of Australian shares to deliver long-term capital growth and income, will keep its interim dividend unchanged at 10c a share.
In the six months to December, its performance was hit by dividend cuts among large miners, energy companies and supermarkets, but Mr Barker welcomed the moves by mining giants BHP Billiton and Rio Tinto to dump their "progressive" dividend policies.
On the broader market outlook, Mr Barker said uncertainty from the Trump administration would trigger greater volatility, the severity of which would depend on whether the government followed through on its rhetoric with policy change.
Vox volatility
If they start to do some of the things they have been saying, then investors might get pretty concerned about that.
AFIC's Ross Barker on the Trump presidency
"If they start to do some of the things they have been saying, then investors might get pretty concerned about that. That would precipitate volatility, or maybe interest rates start rising more quickly than people are anticipating, and that could create volatility," he said.
He said falls of 5 to 10 per cent could "easily happen," though stressed he was not predicting that outcome.
ANZ last year became the first major lender to cut its payout to shareholders since the global financial crisis, but whether its rivals will follow suit is a key point of contention among analysts.
Citi's Craig Williams last week said the rally in bank shares in recent months suggested investor expectations for the sector were too high for this year, saying it would be another "tough" period for profitability.
Mr Williams said Westpac and NAB both had dividend "vulnerabilities," citing their high dividend payout ratios. Mr Williams is forecasting NAB and Westpac will cut their dividends in 2018.