Are the Big Four banks the next Telstra?

Mums’ and dads’ dividend darling, Telstra, is losing its allure and there are warning signs the Big Four banks could head the same way.

The Commonwealth Bank, NAB, Westpac and ANZ, and their juicy yields are set to face similar challenges to Telstra as the household names face difficulty maintaining potentially “unsustainable” dividends.

Telstra’s share price has more than halved since 2015, thanks to fierce competition and pressure from the NBN.

Also read: Greed, short-term profits at core of banks’ bad behaviour: Royal Commission

Just as Telstra’s core assets like mobile use came under sustained challenges, so too will the big banks’ mortgage books, according to portfolio manager at SG Hiscock, Hamish Tadgell.

This, accompanied by subdued earnings growth and a high-profile and embarrassing Royal Commission, means “the banks could look more like Telstra in five to seven years”.

Tadgell explained: “The banks at the moment are under a margin pressure because of product change but also because of low credit growth, and I think that’s an environment we could be in for quite a bit of time.”

Also read: Pay-back time: Westpac flags $235m earnings hit

He said banks’ lower-growth state means they need to reinvest in the business to maintain growth. At the same time, their mortgage books are under pressure from new entrants and regulatory changes.

“What analysts don’t appreciate and miss all the time is that when boards and directors sit down and decide whether they’re going to change their dividend policy… they don’t talk about how they could shift it a cent, or shift it half a cent.

“They hold onto that as long as they possibly can and generally there’s this capitulation point where they cut and it halves. It steps down, it’s unsustainable, they’ve probably been overpaying for a couple of years but going forward it’s not sustainable.

“This, in my view, is the big risk with the banks.”

Also read: This is how long it takes for big banks to pay you back after a breach