APRA relaxes bank dividend payout curbs

Regulators scrap guidance restricting bank dividends at 50pc of earnings, but caution lenders to keep payout ratios sustainable.

The prudential regulator has scrapped its guidance restricting bank dividend payouts at 50 per cent of earnings. (Picture: AAP

The prudential regulator has scrapped its guidance restricting bank dividends at 50 per cent of earnings, but cautioned lenders to moderate payout ratios to ensure they are sustainable.

From the start of calendar 2021, banks will be released from the dividend constraints that were put in place earlier this year as a means of bolstering balance street strength through the COVID-19 pandemic.

“Since July, there has been an improvement in the economic outlook, bank capital and provisioning levels have strengthened, and the majority of loans that were previously granted repayment deferral have recommenced repayments,” APRA said on Tuesday.

“However, a high degree of uncertainty remains in the outlook for the operating environment.”

The onus will be on boards to moderate dividend payout ratios to ensure they are sustainable, taking into account the outlook for profitability, capital and the broader environment, the prudential regulator cautioned.

“In determining the appropriate level of dividends, APRA expects ADIs and insurers to remain vigilant, regularly assess their financial resilience through stress testing, and undertake a rigorous approach to recovery planning.”

The updated capital guidance was informed by extensive stress testing conducted through the year, APRA said.

The tests indicated that Australia’s banking system could withstand a very severe economic downturn and continue to support the economy by supplying credit to households and businesses.

In its severe downside scenario, the economy would suffer a 15 per cent fall in gross domestic product, a rise in unemployment to over 13 per cent and a fall in national house prices of over 30 per cent.

The scenario also assumed that banks would not take any mitigating actions, such as raising capital or reducing operating costs.

Even in this severe case, the results indicated a 5 percentage point fall in the CET1 capital ratio of the banking system, from 11.6 per cent to 6.6 per cent.

“However, this remains well above the 4.5 per cent minimum capital requirement, and does not factor in mitigating actions that would inevitably offset this impact,” APRA said.

APRA chair Wayne Byres said a decade-long process of increasing capital levels and bolstering resilience in the banking system had put Australian banks in a position of strength.

“The results of APRA’s extensive ADI stress testing provide reassurance that the banking system remains well positioned to absorb the impact of a severe economic shock and retain the capacity to continue supplying credit into the economy,” he said.

“While the reduction in the number of loan repayment deferrals and improved economic outlook have allowed APRA to relax its July guidance for ADIs to retain at least half their earnings, the boards of ADIs and insurers are expected to maintain a prudent approach to capital management and dividend payouts,” he warned.

As the COVID-19 crisis tore through the economy earlier this year, APRA initially told lenders and insurers to “seriously consider” suspending dividends until risks had receded before it put a 50 per cent limit on payouts in July.

This shift from the regulator on Tuesday was widely expected, after Mr Byres in November hinted APRA was considering relaxing the caps due to increased capital in the sector and a more positive economic climate.

Morningstar banking analyst Nathan Zaia said removing the cap was a logical and reasonable move.

“Economic conditions have improved materially, temporary loan deferrals have fallen, they’ve taken the provisions and they have increased capital buffers.

“At some stage it becomes pointless to make them keep building on these buffers. I think we’ve reached that point,” Mr Zaia told The Australian.

The tricky part from here is how much of next year’s earnings will the banks pay out, he said.

“CBA has about $9bn of equity above the regulatory benchmarks. It’s going to take more than just the higher payout ratio to get that back to shareholders. So I wouldn’t be surprised if there are some buybacks coming down the track.

“We’re going from one extreme where you can’t pay out dividends to probably seeing a lot more coming back to shareholders.”

Despite the removal of the cap on dividends and the prospect of bumper payouts in the coming year, the banks ended Tuesday’s session in negative territory, with the APRA update looking already priced in.

At the close of trade, CBA was down 1 per cent at $83, Westpac had fallen 0.5 per cent to $19.93, NAB was 0.7 per cent lower at 23.38 and ANZ was down 0.9 per cent at $22.97.