Want 11.3% from a bank?

Greed’s having a minor triumph over fear on the Australian market today, a reversal of Friday’s outcome, as investors are tempted into betting that Europe won’t commit financial suicide.
The temptation is considerable. On Friday’s closing price of $19.50, Westpac shares dividend of $1.56 over the past year represents a yield of 8 per cent. Add on the franking credits and it’s the pre-tax equivalent of about 11.3 per cent.

The other Big Four banks weren’t far behind, the NAB yielding 7.9 per cent, ANZ 7.5 per cent and CBA 7 per cent. As a rule of thumb, risk warning bells should ring when you see the offer of double-digit returns in Sunday fish-wrapper advertisements alongside plugs for miracles with vinegar and magnet cures for arthritis. Yet on Friday afternoon all our big banks were offering just that.

 

Back in May, when Europe was a serious problem rather than a crisis, the banks required their franking credits to get up to that sort of yield, and were still a very competitive investment. Europe’s threat to the global banking system has whacked the local banks’ share prices, but in the process pushed their yields to dizzying heights.
The catch of course is that the dividend payments have to be maintained, which they weren’t in 2009 despite Gail Kelly claiming they would be. The market was screaming that dividends would be cut and the Westpac board either didn’t know what was happening with their bank, or worse.

The banks’ dividend payments did recover though and the Big Four are now stronger institutions than they were when the GFC first struck, relying less on overseas funding and having painfully tidied up their books.
The likes of ABC Learning, Babcock & Brown, Allco, Citi Pacific, MFS et al have been dealt with. The surviving property trusts have been massively recapitalised and numerous property developers cut off from funding.
The risk of global contagion remains, reflected in the banks’ pricing, but so are those enticing yields. Must be time to ask Gail about her dividend sustainability…


Thanks to The Age