Big four investors can expect to see a windfall as banks empty war chests

Shareholders in the major banks could be in for a dividend windfall or a share buyback as the Big Four release capital that had been stored away for the expected bad times brought about by the pandemic.

Apr 14, 2021, updated Apr 14, 2021

In a note to investors, Brisbane-based brokers Wilsons said the provisioning by the banks still looked excessive despite being halved since December.

It said the core capital retained by banks, known as CET1, had been growing and there was a potential surplus of between $9 billion and $20 billion.

“At current prices that is broadly equivalent to an additional dividend payment.”

Wilsons said rising house prices, materially stronger employment numbers and low interest rates suggested provisioning against bad debts was also “still too high”.

“We believe the banks over-provided for the risks of Covid-19 related bad debts.

“We are expecting an unwinding of these provisions over the next 12 months as the predicted surge in bad debts fails to materialise.”

“We have seen two of the major banks write back provisions at the full year 2020 results in November and (we) think this will be the theme in the upcoming May results.

“The good news for dividend-focused investors is that dividend revisions are significantly outpacing earnings revisions.

“It is likely banks will show investors a pathway to capital returns in May, but will not act until the November 2021 results. Both banks and regulator conservatism will win the day.

“We suspect buybacks are preferred given franking balances and greater long-term benefits than a reduction in capital can provide.”

However, payout ratios are still below pandemic levels.

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