Thursday, 26 February 2009

ANZ to Cut Dividend 25%

It was just a year when I first asked the question Time To Buy The Big 4? My answer at the time was no. Then 6 months later I offered that it still wasn't time to buy banks.

I say this not to boast. but to point out that, what was said then still applies now. That is, in a weakening economic environment where credit growth slows and bad debts are on the rise, bank earnings will weaken.

Today ANZ was the first Australian Major Bank to announce that they are cutting their dividend (although CBA has alluded to doing as much). The company said that dividends for 2009 would be cut by approximately 25%. Michael Pascoe has this to say in the smh:

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.

Can't disagree with that. The market has been well ahead of the CEO's of Australian banks. In addition to the dividend cut, ANZ announced that their provision for bad debts is set to rise by about $500m from last year to approximately $2.4 - $2.5 billion and that they would be taking a mark to mark charge of approximately $370m on what they call "credit intermediation trades" which I'm guessing is another name for stupid bets on credit default swaps.

So who's next is the question, CBA has already hinted that they will be cutting their dividend, surely NAB's is on the chopping block as well? It's been the right call to bet against the banks for last 18 months and given the current outlook, I see no reason to change that view.