Financial watchdog tells banks to resume dividend payments, but there’s a catch

There was some good news for investors on Wednesday as the national financial services regulator, Australian Prudential Regulation Authority (Apra), eased restrictions for banks to resume dividend payouts. However there was one catch, as they are set to be paid at a reduced rate going forward.

The new dividend payout ratios will be capped at 50 per cent for the remainder of the calendar year to ensure at least half of all earnings are retained by the banks themselves. The new instructions come after the prudential regulator issued emergency advice to banks in April, telling them to “seriously consider deferring” or at least “materially reduce” dividend payments.

Prior to the coronavirus crisis, Australian banks maintained a payout of between 75 and 95 per cent of profits to shareholders. Apra Chair Wayne Byres said resuming dividend payments at the reduced rate would strike a balance between the banks’ need to support households and businesses while also maintaining a prudent approach in a “sharp and severe” economic contraction.

“Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by Covid-19,” he said. “On that basis, Apra believes that banks and insurers do not need to continue to defer capital distributions.

“In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from Covid-19, and restrictions on dividends from their New Zealand operations. Apra has therefore set an expectation that dividend payout ratios for ADIs (Authorised Deposit-taking Institutions) will be maintained below 50 per cent for this year.”

Along with seeking to hold back half of all earnings, banks were also advised to “conduct regular stress testing” and “make use of capital buffers to absorb the impact of stress”.

The move comes amidst rising concerns about the banking sector, as increasing unemployment rates paired with the economic shut down is expected to trigger higher lending losses and hit business loans. However, it comes as a relief to investors who were fearing the suspension would extend through the current reporting season.

Following the regulator’s original guidance in April, around $5 billion worth of bank dividends were held back from shareholders with each of the big four banks choosing a different option that will now affect how the payments return.

In April, ANZ deferred its half-year payment with Westpac also deferring the interim dividend in May. Meanwhile, NAB slashed its interim payment by 64 per cent from 83c to 30c in April and Commonwealth Bank paid out a base-rate interim dividend of $2 per share in March.

Commonwealth is the only bank of the big four to have already signed off on accounts for the end of June, while ANZ, Westpac and NAB are set to make announcements on the future of the payments in August.

Prime Minister Scott Morrison spoke briefly on the matter on Wednesday saying he welcomed Apra’s announcement and its continued “fleet-footedness” during the crisis. “It will ensure banks will have continued flexibility to be able to deal with the commitments that their clients have on their mortgages and business loans and things of that nature,” he said.