The dividend question is a big one. But it is certainly not set in stone. Quotes from a recent Fin Review article, with my comments in italics. There is no agreement amongst the analysts.

Bank dividend payments will be anyone's guess

Investor hopes for dividends from the major banks appear to rest on a guessing game this earnings season, but there's still a good chance that payouts will be declared,amid warnings interim dividends will be cancelled altogether.

The Australian PrudentialRegulation Authority expects a "prudent reduction in dividends" inthe current economic climate, with any returns to be paid out only after extensive stress testing and consultation with the regulator.


A lot seems to depend on how quickly the COVID 19 situation normalises, and just how much impact there is in relation to bad debts. The faster things get back to a more normal state- the greater the possibility the impact on the banks will be less severe.

While there's every chance the banks could decide to paint a rosier picture of the economic downturn to satisfy their retail investor base, that could come at a cost.

"Boards and bank managements obviously won’t like cutting dividends and will likely initially present the optimistic stance that this episode is manageable and short term," saidE&P analyst Matthew Wilson.

"However, the market willget ahead of them. And because of being too optimistic the ultimate outcome forshare holders is made worse."

Yet, if the situation is improving, the market won't won't ignore the fact.

RELATED QUOTES

BOQBank of Queensland

$4.70 0.21%

1 year1 day

May 19Aug 19Nov 19Feb 204.006.008.0010.00

Updated: Apr 24, 2020 – 5.22pm. Data is20 mins delayed.

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NABNational Australia Bank

$15.76 0.25%

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WBCWestpac Banking Corporation

$15.33 0.33%

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ANZANZ Bank

$16.02 0.06%

May 19Aug 19Nov 19Feb2010.0015.0020.0025.0030.00

That's reflected in bank share prices which are down 32.3 per cent this year. A sharp recession followed by expectations of a V-shaped recovery, as predicted by theIMF, is unique in the context of downturns.

"The [APRA] stress tests look pretty good [for a normal recession] but this is not that usefulnow," said Atlas Funds Management chief investment officer Hugh Dive."It's not the playbook from the GFC or 1991."

The traditional stress testsassume a much more gradual deterioration and nothing in the modelling accountsfor a shutdown of the economy. The models also assume a much more gradualrecovery.

But the recovery looks like it may start soon- and in some sectors, like mining and grocery retail, isn't even necessary.There was no downturn!

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The banks have been quick topoint this out, with Bank of Queensland chief executive George Frazis saying inearly April it would be months before a sensible stress test could bedeveloped in conjunction with APRA.

While BoQ deferred its interim dividend in early April, it was only because APRA said any payouts would need to be approved first, giving the board insufficient time.

Morgan Stanley on Thursday agreed there was a large level of uncertainty hanging over stress testing forecasts.

"It will be difficult to determine the severity of the loan loss cycle until loan deferrals and theJobKeeper program end," said analyst Richard Wiles.

So, there is no applicable APRA stress test.

Other factors will also need to be accounted for, including each bank's collective provisions which are meant to be based on historic loss experience and adjusted for current market conditions.

"The banks are going to haveto provide a large collective provision but they're sort of guessing whatthat's going to be," said Mr Dive.

UBS analyst Jonathan Mottpredicts a balancing act for the banks.

"If the banks are seen tounder-provide the market may view them as unrealistic and imprudent. While if they are seen to over-provide, the market may be equally shocked," hesaid.

While UBS is forecasting ANZ, NABand Westpac pay no interim dividends, Citi says the banks could cut by just 15 per cent under one scenario.

Morgan Stanley argues either thebanks materially cut their dividends by 40 to 60 per cent or defer them, withno guidance on when payments could resume.

So, surprise, no agreement amongst the analysts.

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