SYDNEY (Reuters) - Australia’s biggest banks would likely be forced to reduce their dividends if the country’s central bank continues to lower the cash rate as forecast, Goldman Sachs (GS.N) said on Monday.
A review of the Australian corporate earnings season which ended a fortnight ago by the investment bank found that less than half of local companies grew their earnings per share in the second half of the 2019 financial year amid revenue growth challenges.
This prediction mirrors a similar forecast by UBS late last month, saying that the Australian banks could need to cut their payout ratios and potentially raise capital to cover the costs stemming from the Royal Commission last year.
UBS forecast in late August that the Australian banks could need to cut their payout ratios to cover the costs stemming from the Royal Commission last year.
Australian companies now paid out about 80% of their profits in dividends, which was the second highest in history, and would now likely fall in line with the reduced revenue growth as a result of slower economic growth, Goldman Sachs strategist Matt Ross said on a media call on Monday.
Goldman Sachs has forecast the Reserve Bank of Australia (RBA) will cut the 1% official cash rate by 25 basis points at both the central bank’s November and December meetings.
“If we see those cuts, the banks net interest margins are going to come a lot more pressure,” Ross said.
“The dividends could be cut, it is going to be a lot harder to maintain the payout ratios.”
The top four Australian banks account for 23% of the S&P/ASX200 market capitalization, according to Refinitiv data and are the most widely held stocks, which means their dividend payments are closely monitored by investors.
Goldman Sachs said dividend per share payout across the market rose by 13% in the past financial year, which outstripped the 3% earnings per share growth recorded in the same period.
The big Australian banks – Commonwealth Bank (CBA.AX), National Australia Bank (NAB.AX), Westpac(WBC.AX) and ANZ (ANZ.AX) - account for 32% of the total dividends paid in the past year, Goldman Sachs said.
The broader financial index, which includes insurance and wealth management stocks, account for 50% of the total dividends paid out across Australia.
NAB cut its 2019 interim dividend by 16% in May, its first in a decade, while ANZ was the first bank to reduce its dividend payout ratio three years ago.
Reporting by Scott Murdoch in SYDNEY; Editing by Rashmi Aich