ANZ is being penalised for a below-peer dividend payout ratio and there is a strong case for the ratio to be lifted, Deutsche Bank analysts say.
Analysts James Freeman, Andrew Triggs and James Wang say in a research note that ANZ could certainly pay out 70% of profit and could theoretically sustain a payout ratio of as much as 81%. This compares with the bank's current payout ratio of just 65%.
"With the market chasing yield, we believe ANZ is being penalised for its lower than peer payout ratio."
ANZ is due to announce its interim earnings tomorrow (Tuesday, April 30) and the consensus of analyst's forecasts is for a cash profit of A$3.14 billion.
The Deutsche analysts, who are forecasting cash earnings of A$3.09 billion, say ANZ is the "only bank in Australia" to have not increased its payout ratio to reflect the lower growth environment in recent years.
"While most Australian banks have boosted their payout ratios materially in recent years, ANZ's has remained relatively stable at an average of around 65% over the past seven years - if 2009 when the payout spiked to 80% is excluded," they say.
"With the peers having lifted their payout ratios by 5 percentage points [over the past six years] and ANZ's return on equity (ROE) not too dissimilar to that of (BNZ's parent) NAB and Westpac, this suggests that there is capacity for ANZ to follow suit."
Freeman, Triggs and Wang state an argument for ANZ upping its payout ratio to 70%, which they say would deliver "sector-leading yield".
However, using "a relatively conservative set of assumptions" they say ANZ could pay out as much as 81% of cash earnings and still retain a Basel III core tier one capital ratio of 8%. They base this calculation on long term growth in ANZ's risk-weighted assets (RWA) of 6%, a maintainable ROE of 17% and a lower than present dividend reinvestment plan participation rate of 20% - factoring in removal of the dividend reinvestment plan discount and therefore a corresponding drop in the participation rate.
The analysts say, however, that franking a much higher dividend payout ratio would be challenging as Asian operations become a "much more meaningful part of the group".
"However, on our calculations, ANZ will still be able to fully frank a dividend payout ratio of 70% for the next three years despite a rising Asia contribution." They say that ANZ had a "strong franking balance" of A$386 million as at the end of the 2012 financial year and this had remained relatively stable over the past few years.
"...On our calculations [based on a 70% payout ratio] ANZ would still retain a positive franking credit credit balance by the end of full-year 2015.
"We believe that ANZ is acutely aware of the franking credit issue and longer term we expect they would look to a [duel listed] structure/in specie distribution of the NZ business if they wanted to retain a higher dividend payout ratio in the longer term and still pay out fully franked dividends."
Freeman, Triggs and Wang say ANZ remains committed to Asian expansion. But with the recent departure of Alex Thursby, chief executive of ANZ's international and institutional division and a key proponent of the bank's aggressive Asian push, coupled with high Asian valuations, it is likely the bank will now have less of an appetite for short term Asian acquisitions. This will reduce the need to hold "excess capital".
They say that a 70% payout ratio would fund risk weighted asset growth of about 8%.
"Based on our full-year 2013 and full-year 2014 forecasts this would increase the dividend yield to 5.6% and 6% respectively, which would place it at the top end of peers from a yield perspective."
In a separate research note, JP Morgan's Scott Manning, who is picking an ANZ interim cash profit of A$3.07 billion, is expecting a dividend payout of A68c a share. He says this is slightly below market consensus (A69c) and would represent a 60% payout.
"With ANZ [stock] underperforming NAB and Westpac by about 5% [on price] since major bank trading updates in February, in our view ANZ's lower payout ratio needs to be converted into higher revenue growth, the latter currently being compressed by ongoing headwinds relating to institutional margins," he says.
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1 Comments
DH have you a copy/link for the Freeman Triggs Wang note?
This looks pretty Oz centric, However not a bad example of market players trying to turn corporate actions.
To the layperson one would think banks should store a little cash re GFC, re RBNZ intentions and ANZ expansion to Asia etc... given the banks are geared 15 plus to 1..
However, as ANZ has been shown to be gteed by both NZ and Aust govt. (soon to be NZ depositers) when things look tight, no worries... strip the place of cash.... who needs retained earnings when ones too big to fail...
Where would FTW keep their loot?
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