Australian Banks: All Down To The Economy

Feature Stories | May 25 2020

The focus of recent bank earnings reports was not that of earnings, but of capital positions and bad debt provisions in the face of a recession only just now manifesting.

-Australian banks' past half’s earnings not particularly insightful
-Capital management the key focus
-Bad debt forecasting a challenge
-Valuations build in risk

By Greg Peel

As the world ticked over into 2020, Australia was staring down a recession, exacerbated by a bursting of the housing bubble, which had already forced the RBA into cutting rates. All around, bushfires were raging, adding to recession fears. Even the government’s stubborn budget surplus intentions began to develop cracks.

Our biggest trading partner was now dealing with some new SARS-like illness.

Australia’s bank analysts were already predicting subdued growth, if any, in the face of the housing slide, and were convinced dividend payout ratios were unsustainable.

When Australia ultimately went into lockdown, and the stock market crashed through to late March, the question was no longer whether the banks would cut their dividends but by how much, and whether they may need to raise fresh capital. All of course, at that stage, was a Great Unknown.

“The bottom line is the longer the country remains in lockdown, the greater the number of unemployed workers, bad debts and bankruptcies. This is, or at least was, the swing factor in bank analysts determinations of the potential of, and the extent of, bank dividend cuts, bearing in mind the banks were likely to cut, analysts assumed, even before the virus emerged.”

This is an excerpt from Australian Banks: There Go The Dividends, published on April 8 (

“Analysts had gone to a lot of effort to produce base case and bear case scenarios the two largely split on the possible longevity of the crisis using assumptions about peak unemployment levels and the impact on mortgage defaults, and peak business stress and the impact on loan defaults. These scenarios had informed dividend assumptions, and the consensus conclusion was that elevated dividend payout ratios would have to be reined in, amounting to dividend cuts.”

But just as debate was raging, and even as the stock market began to rebound, APRA stepped in to direct the banks to either defer or significantly cut their dividends. There would have been some sense of relief in bank boardrooms, for now the difficult decision was as good as taken out of their hands.

Such a directive from the regulator came as a surprise, given it was APRA who had insisted that given the GFC experience, prior to which Australia’s (and global) banks were clearly under-capitalised, Australian bank balance sheets had to be “unquestionably strong”, which was eventually defined as carrying 10.5% in tier one capital. And well before APRA’s deadline, the banks were all unquestionably stronger than unquestionably strong, which, along with low levels of bad debts, had allowed for elevated dividend payments up to that point.

Now the regulator was implying, by directing the banks to defer or slash their dividends, that capital positions were not unquestionably strong at all.

From late April, the banks began reporting their first half earnings results, at which they were due to announce their capital management plans. The exception was Commonwealth Bank ((CBA)), which accounts on a July-June basis as opposed to October-March for the other Big Three. CBA had already delivered its earnings result in February and made no dividend cut, and had subsequently already paid that dividend, when it provided a March quarter update once the other banks had reported.

ANZ Bank ((ANZ)), National Bank ((NAB)) and Westpac ((WBC)) all reported their first halves, which given they stretched from October, were never going to provide a realistic view of virus impact. That would have to wait to the second half (end-September).

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