Australian bank dividends this financial year are likely to be better than expected as a result of the institutions’ preparations to stave off the worst of the COVID-19 market downturn last year, according to a boutique Australian investment manager.
Ausbil Active Dividend Income Fund portfolio manager Michael Price said there was a consensus outlook dividends would grow this year, as well as into 2022 and 2023, and the banking sector was primed for this growth.
“Banks, which offer primary exposure to a recovering economy, entered the pandemic after a heavy barrage from the Hayne inquiry and having already been sold down. The pandemic saw them sold down further on fears that the recession and COVID job losses would impact their lending books,” Price said.
He recognised all the banks had made provision for potential losses and were able to retain capital after the Australian Prudential Regulation Authority (APRA) limited the level of dividends they could pay during 2020.
“Looking at the banks in the 2021 new year, it was evident that the bad and doubtful debt experience was nowhere near predictions and that the banks had over-provisioned for losses,” he explained.
“With APRA allowing a return to more commercial dividend levels and the economy resurging from the 2020 lows, we could see banks were in a position to reduce these provisions and grow their books further in a renewing real estate market.
“The result is that over the next few years, the unwind of this over-provisioning will see a rerating of earnings, ahead of the consensus expectation at the time we began up-weighting into banks.”
The manager forecast economies would run ‘hot’ for some time, and this was supported by policymakers, and so deliver the best growth figures since 1983 across a multi-year growth profile.
“Ausbil’s house view is that consensus is still underestimating the rebound in earnings that will occur in the prevailing economic conditions, with rates to remain low, and with the world economy providing a tailwind to Australia’s current expansion,” Price said.
“This will only further benefit the dividend payers on the market, and most benefit investors who are able to actively allocate to the best blend of dividend and franking credits across the market, across each month of the year.”''