A question I’ve been asked a lot on the back of the Royal Commission is what is going to happen to bank shares. Given the banks are an important part of the economy and represent nearly 30% of the investable market, people want to know if the performance of the banks and their dividends can be maintained.
As an investment, the key aspect to consider is how sustainable bank earnings are. You want to invest in a company that is growing its earnings and is able to pay dividends back to shareholders. Historically, banks have grown their earnings solidly over the past decade and have been a good payer of dividends to shareholders.
In recent times, banks have faced a challenging environment from a regulatory standpoint. Credit lending standards have increased meaning banks need to hold more capital on their balance sheets. We’ve also seen demand for household credit start to dissipate. These elements all make it harder for banks to grow their earnings and to pay out dividends.
Thinking about the outlook for banks, we still remain confident in the stability of our banking sector – it’s arguably the best in the world. But we do believe bank earnings will moderate over the next 12 to 18 months and this may affect payout ratios and the absolute level of dividends. This doesn’t mean that banks won’t deliver a solid income to investors, but it’s still important to think about how your own portfolio is positioned and whether you have the right mix. So when thinking about the banking stocks in your portfolio, it’s worthwhile talking to your advisor about whether they’re delivering the right level of growth vs. income for your strategy.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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