anz's misdirection

Michael Pascoe
February 26, 2009 - 1:53PM
So the market knows what's happening in Australian banking and the ANZ's highly paid CEO does not. That's the kind reading of Mike Smith's announcement of a 25% cut in the bank's dividend.

In this space on November 19, I translated the banks' share prices thus:
The market is telling the CEOs: ''You're wrong. You don't know how to run a bank. You think Australia is going to have a soft landing when it's really going to crash. You're incompetent or you're lying and you'll cut your dividends.''

This was the month after the CEOs placed their hands on their hearts and more or less said they wouldn't be cutting dividends as the scrambled to raise capital. Here's part of the transcript from Smith's post-profit analyst briefing on October 25:

Mike Smith: I felt the market just would not accept a dividend cut right now and I didn't think we needed it right now. The issue is, what are the alternative means of raising capital in the future, so it's a bit of a balancing act. What I'm hoping is that the market will move and/or there will be opportunity to do other things.

Analyst: Won't you have to cut the dividend in the future?

Mike Smith: No.

There were similar conversations with the other banks, but the November 19 article focussed on Westpac and ANZ as they respectively represented the market's first- and fourth- rated banks.

On October 30, not only was Gail Kelly boasting about having just increased the divy, but she waxed lyrical about maintaining that trajectory of higher dividends.

It was amazing stuff and the market simply didn't believe either of them. In the ANZ's case at least, we know the market was right.

Misled or mishap

So the question then arises: was Smith attempting to mislead the market or simply incompetent in not being able to adequately assess his bank's outlook when the entire investment community could.

If it was the first, he should of course be sacked immediately. If it's the second, it doesn't inspire much confidence in his leadership. A pay cut matching the dividend reduction - 25% - would seem entirely appropriate.

Ditto the directors' fees. The board was complicit in the dividend rhetoric and as they are now telling shareholders they'll have to tighten their belts, the directors should adjust a notch as well.

And this is a board with problems, reigned over by Charles Goode since 1995 and now looking at a seriously under-qualified replacement in Rod Eddington.

But expecting dramatic solidarity of directors, CEOs and shareholders is like wishing that people in general should also be nice to each other and live in peaceful harmony throughout the world, seeking only what is best for others and the planet.

Next?

The next question for shareholders in a market so dominated by the key banking stocks is which bank cuts next. The CBA as good as told us they would be doing the deed, having made the mistake of increasing their final dividend last time round. The NAB needs to as much as the others, leaving only Westpac as a possible holdout.

But probably not - why bother when you only have to be judged in a peer group like this one?

The saving grace though is that bank dividends, even after a 25% cut, still represent an amazing after-tax yield, certainly much better than the banks offer depositors. And, when the economy stabilises, the Big Four will eventually power out of the downturn with less competition, more pricing power and higher share prices.

That's if the CEOs aren't really incompetent.

Disclosure: The Pascoe family super fund holds ANZ and Westpac shares.

Michael Pascoe is a BusinessDay contributing editor