What the analysts are saying: ANZ and CBA upgraded on dividend sustainability

Citi Research has upgraded ANZ and Commonwealth to a Buy because they offer sustainable dividends and attractive yields.

Citi's view, in a report issued in Friday, is that dividend sustainability has taken on greater importance for investors in an environment where there is little prospect of significant capital gain.

Citi said that "the bank sector's forward dividend yield of 7.3 per cent currently exceeds 10-year government bonds by a margin of 4.4 per cent."

Citi applied a stress test to the major banks to see how their dividends would hold up under a seven per cent fall in GDP (a one in 30-year event).

Its view was the ANZ and Commonwealth would come through such a shock in good shape.

Its positive view on ANZ's dividend sustainability is based on the bank's improved credit quality. Citi also likes ANZ's Asian strategy

Commonwealth's strengths lie in its high profitability and strong credit quality.

Citi said Commonwealth was a capital-efficient business because of the contribution from its large wealth management business.

Another point in the bank's favour was that it was nearing completion of its core banking modernisation project and had got through the "major risk stages" of the project.

Citi maintained its Buy recommendation on National Australia Bank and its Neutral recommendation on Westpac.

It said: "Westpac performs by far the worst in our stress testing – [with] a combination of a higher payout ratio, lower initial capital ratios and a poorer quality business-lending book than is widely understood."

In Citi's view, Westpac's took on a book of lower quality business assets when it bought St George Bank in 2008.

In NAB's case, its UK exposure has created credit quality issues that might affect its ability to maintain dividends in a severe downturn.