Big Four banks face dividend pressure with payout ratios at peak levels
The Big Four banks have pushed payout ratios to around 75%, nearing the top of their target ranges. Here's what happens next.
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KEY POINTS
- Australian major banks have increased dividends by an average of 17% over the past two years, pushing payout ratios to around 75% and near the top of their target ranges
- ANZ faces the highest risk of a dividend cut with a projected 73% payout ratio against its 60-65% target, followed by WBC at 76% versus its 65-75% target
- Morgan Stanley expects most banks to hold dividends flat for extended periods, with ANZ and WBC maintaining current levels until mid-2027 and NAB until early 2026
- CBA is the only major bank forecast to deliver strong dividend growth through 2027, while WBC remains the only bank whose dividend hasn't returned to pre-pandemic levels
- Even without actual dividend cuts, bank share prices could face pressure if investor concerns about dividend sustainability increase, particularly for banks with the most stretched payout ratios
Australia's major banks are approaching a crossroads on dividend sustainability as their payout ratios climb near or above target ranges, raising questions about the longevity of recent generous shareholder returns.
Sharp Dividend Growth Pushes Ratios to Limits
ANZ, Commonwealth Bank, NAB and Westpac have delivered strong dividend growth over the past two years, with payouts rising an average of 17% from FY22 to FY24. This aggressive increase has pushed average payout ratios up by 5 percentage points to around 75%.
Looking ahead to FY25, Morgan Stanley analysts expect payout ratios to test or exceed the upper bounds of each bank's target range. ANZ is projected to reach 73% against its 60-65% target, while CBA could hit 79% compared to its 70-80% range. Both NAB and WBC are forecast to reach 76%, above their respective 65-75% targets.
Pre-Covid Precedence Raises Red Flags
The current situation mirrors the period before COVID-19, when elevated payout ratios similarly sparked investor concerns. Between 2016 and 2018, NAB and WBC maintained payout ratios around 80% or higher before eventually cutting dividends in 2019. ANZ moved earlier, reducing its dividend in 2016.
Despite these historical precedents, Morgan Stanley's base case scenario assumes no dividend cuts across the major banks and expects bank boards to maintain current dividend levels, allowing payout ratios to temporarily exceed target ranges while capital buffers remain adequate.
Dividend Forecasts Signal Stability
Under Morgan Stanley's projections, three of the four majors are expected to hold dividends steady for extended periods. ANZ and WBC are forecast to maintain half-yearly dividends of 83 cents and 76 cents respectively until mid-2027, while NAB is expected to hold at 85 cents until early 2026.
CBA stands out as the exception, with analysts forecasting the strongest dividend growth among the Big Four through 2027. Notably, WBC remains the only major bank whose dividend hasn't returned to pre-pandemic levels.
DPS (cents) | FY24 | FY25e | FY26e | FY27e |
|---|---|---|---|---|
ANZ | 166 | 166 | 166 | 166 |
CBA | 465 | 485 | 515 | 555 |
NAB | 169 | 170 | 171 | 177 |
WBC | 151 | 152 | 152 | 153 |
Source: Morgan Stanley
Dividend Yield | FY24 | FY25e | FY26e | FY27e |
|---|---|---|---|---|
ANZ | 5.6% | 5.6% | 5.6% | 5.6% |
CBA | 2.6% | 2.7% | 2.9% | 3.1% |
NAB | 4.4% | 4.4% | 4.4% | 4.6% |
WBC | 4.6% | 4.6% | 4.6% | 4.6% |
Source: Morgan Stanley
Risk Assessment Points to Potential Pressure
While dividend cuts aren't expected in the base case, Morgan Stanley's scenario analysis reveals vulnerability if economic conditions deteriorate. The analysts modeled potential impacts from lower net interest margins and higher loan losses, which could push payout ratios into unsustainable territory.
The analysis suggests ANZ faces the highest risk of a dividend cut, followed by WBC. This assessment reflects their current payout ratio positions and financial flexibility compared to peers.
Market Implications
Even without actual dividend cuts, Morgan Stanley warns that trading multiples could face pressure if investors become increasingly concerned about dividend sustainability. This dynamic could create headwinds for bank share prices, particularly for institutions with the most stretched payout ratios. While current capital positions appear adequate to support existing dividend policies, any significant deterioration in operating conditions could force boards to reassess their shareholder return strategies.
