APRA eases bank payout guidance

Commonwealth Bank will be the first of the major banks to respond to revised APRA guidance on dividends.

Commonwealth Bank will be the first of the major banks to respond to revised APRA guidance on dividends.

Commonwealth Bank will be the first of the major banks to respond to revised APRA guidance on dividends, after the prudential regulator eased restrictions on Wednesday by advising bank boards to retain at least half of their earnings.

The updated guidance, which prompted a morning rally in the big four lenders, replaced the recommendation in April that banks and insurers “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”.

The reason for the change, according to APRA, was a clearer economic outlook, and the results from a round of stress testing and financial projections in both sectors. Chairman Wayne Byres said the announcement struck a balance between the strength of the financial system, while at the same acknowledging the difficult path ahead.

“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,” Mr Byres said.

“On that basis, APRA believes that banks and insurers do not need to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy.”

CBA, which reports its full-year result on August 12, will be the first of the major banks to consider a half-year dividend under the new APRA guidance.

The bank paid an unchanged interim dividend of $2 shortly before the regulator’s original guidance in April that urged regulated entities to consider deferrals.

Many analysts were still crunching numbers last night on forecast dividends, saying the ­implications of APRA’s announcement were unclear.

The market, however, pushed bank stocks higher shortly after the new guidance was unveiled, although they drifted down later in the day when Queensland announced it would close its border to greater Sydney due to the NSW coronavirus outbreak.

ANZ led the big four higher, up 2.1 per cent to $18.45, with National Australia Bank (1.6 per cent), Westpac (1.4 per cent) and CBA (1.1 per cent) following in its wake.

Credit Suisse analyst Jarrod Martin rejected the view that the new guidance from APRA was too unclear.

“We’ve gone from deferrals to a 50 per cent maximum payout, which is clearly a less restrictive environment,” Mr Martin said. “It paves the way for a resumption of dividends in the 2021 and 2022 ­financial years. Greater certainty is far better than uncertainty.”

Jefferies analyst Brian Johnson disagreed, saying there was no clarity from the regulator on a range of issues, including the definition of earnings and offsetting capital raisings.

APRA’s move to ease restrictions contrasts with the European Central Bank’s advice on Tuesday that eurozone lenders should not pay dividends until January next year.

The ECB also restricted buybacks and called on banks to be “moderate” in their bonus payments to executives.

APRA’s more lenient approach is understood to reflect its view that Australia has a stronger economy than Europe, and that its banks have greater flexibility because they have already achieved their unquestionably strong benchmark — a common equity tier capital ratio of at least 10.5 per cent.

Conduct regular stress-testing

In additional guidance for the sector for the remainder of the calendar year, the regulator said banks, where possible, should use dividend reinvestment plans and other initiatives to offset the reduction in capital from shareholder distributions.

They should also conduct regular stress-testing to inform decision-making and demonstrate ongoing lending capacity.

APRA said it had formed a view from recent stress tests that the banking system overall was well-positioned to withstand a ­severe downturn, although it would be “severely impacted” if such a scenario were to unfold.

It said in a letter on Wednesday to all the banks that there was a need for continued vigilance and careful planning.

There was uncertainty in the outlook, domestically and internationally, and there was always a margin for error in any forecasts, with stress-test results for individual banks inevitably varying from the average.

APRA also advised lenders to use capital buffers to absorb the impact of stress, and continue to lend and support the nation’s households and businesses.

Mr Byres said banks faced additional challenges to their capital resilience in the current environment, including the large volume of loan deferrals that were subject to regulatory concessions; the 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 will be maintained below 50 per cent for this year,” Mr Byres said.