Banks Yield To The Inevitable

Sun Herald

Sunday November 16, 2008

David Potts

YET more proof the banks aren't quite the pillars of strength they insist came with National Australia Bank's $3 billion capital raising.

A deposit with the banks might be Government guaranteed but their share prices and dividends are not. Neither look safe. The banks are too undercapitalised for falling asset prices and a recession.

Despite their bravado, the banks must have known a problem was brewing, judging by a suucession of too-cute-by-half capital raisings - converting preference shares and, especially, the underwriting of dividend re-investment schemes in the name of "capital management". Anything but going direct to shareholders who might ask questions.

Not that fund managers seem to care. They've thrown $1 billion too much at nab's share placement, which it gratefully accepted.

Nab's ring-around puts a whole new perspective on getting phone calls from charities at dinner time. The funds were done like a dinner.

At least the nab did the right thing by ditching its plan to underwrite its dividends.

These plans are poison for shareholders.

Banks pay brokers a nice fee to take up the shares turned down by those who grab the cash instead. These de facto new shares save cash for the dividend but they depress the price. Especially when the underwriting brokers, once they've pocketed the fee, dump the new shares.

It's true that the banks' dividend yields, taking into account the 30 per tax credit from franking, are up to 11 per cent and an almost irresistible temptation. Great yield, pity about the shrinking share price.

The banks level of bad debts will rise in a slowing economy with falling property prices. As their profits drop there's no way they're going to be able to keep paying such high dividends without huge capital raisings. Talk about robbing Peter to pay Paul.

© 2008 Sun Herald

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