Westpac bank announced that it will not pay dividends for the first half of 2020:

“Given Westpac’s desire to retain a strong balance sheet and ongoing uncertainty in the operating environment, the Board has now decided it is prudent not to pay a First Half 2020 dividend.
Westpac will next consider dividends as part of finalising its Full Year 2020 results.”

Due to a growing number of bad loans held by Westpac, this has put pressure on Westpac Bank’s balance sheet. As such, and with the uncertainty on whether there will be further loan defaults, it appears that Westpac has had to make this tough decision whether investors liked it or not. Further interesting facts released from Westpac included:

  • 78,000 customers have paused the loan repayments deferrals
  • Mortgages in arrears for more than 90 days has increased
  • Common Equity Tier 1 Capital (CET1) at 10.81% of risk weighted assets
  • Further credit losses due to bad loans could be forthcoming

As you can see, there is a fair bit of pressure with Westpac in terms of the outlook at present. This, sadly, will come as no surprise to those who had read the weekly Essay back on the 8th of November last year: Westpac Falling Earnings, Falling Profit! Nobody foresaw COVID-19, but Westpac had falling earnings long before Covid-19 took a hold in the market. The weekly Essay went on to analyse the top 5 banks in Australia, all of which had a similar story on falling earnings. Something had to give… you cannot have falling earnings and expect for dividends to lift or remain in place. In the short-term, you may get away with earnings holding steady despite falling earnings. But in the longer term, this is not sustainable.

Too many investors just ignore what is going on with their shares and hold them in the hope that dividends will continue to hold steady. Maybe it is because we do not want to have to trade out of the shares and buy back into another stock? Maybe it is due to us not wanting to realise any capital gains and the hassle of the paperwork around that? Maybe it is because we know what we need to do but we just cannot bring ourselves to act? I believe the key reason for many investors not taking any action is that they simply are not informed. This is where you have a real advantage in the marketplace…you have the power of VectorVest at your fingertips…like a thousand analysts at your beck and call.

It has been 9 months since we checked in on the banks. Let us check in on the banks for August 2020. How have the banks held up since we last reviewed them in November last year? We have gone ahead and run the analysis. To summarise, I wish I could provide you with better news…but we must call it as it is…since we reviewed the banks on 8th November last year, the key results are as follows up to 14th August:

ANZ.AX is down 28%
CBA.AX is down 8%
MQG.AX is down 7%
NAB.AX is down 35%
WBC.AX is down 34%

Any dividend payments since then pale in comparison to the capital losses!

The Essay back on the 8th of November last year noted: “Are you holding onto stocks and ignoring the earnings profiles as you simply want the dividends and franking credits? As we have seen with WBC.AX, falling earnings leads to falling share prices and falling dividends! One only needs to look at examples such as TLS.AX and BHP.AX for example to see the correlation between earnings, price and dividends over the years.”

Why such falls in the share price? Since November last year, our top 5 banks (by market capitalisation) have continued to see falling earnings and this, coupled with the Coronavirus sell down, has not helped. Yet the market has rallied well in recent months, but it has not been enough…a rising market can only take companies with falling earnings so far.

This week, we got to work and took another snapshot of what is currently taking place with the banks. This time round we will drill in a bit further and look at the Net Profit Margin across the top 5 banks, look at the sales volumes and the current technical momentum.

Key findings from the video for the biggest 5 banks is as follows:

  • Declining sales
  • Declining Net Profit Margins
  • Falling Earnings
  • Fading technicals

Next week I am going to demonstrate the inverse…there is always opportunity out there! We will look for some of the best performers which will paint a very different picture than our banks at present.

Please CLICK HERE to see the video for this Essay.