APRA should review dividend guidance, quickly

The Commonwealth Bank is next week due to announce its profit and dividend for the year ended June 30. Picture: AAP

In the past, Australia’s two greatest assets in a crisis have been its banking and health systems.

And so far in the COVID-19 crisis, apart from the Victorian aged care disaster, both are still intact and remain national assets. But in health, Queensland is a danger, and Monday’s dramatic and extensive shut down is a threat to the national banking system.

When New Zealand, which has a population of five million people compared to Victoria’s 6.5 million, went into lockdown the Kiwis quickly banned bank dividends. The New Zealand banks would need their capital and funds to maintain lending.

In Australia, Victoria is only one quarter of the total population but, in contrast to New Zealand, its starts the lockdown with many of its businesses already in desperate trouble.

Around the nation we have kept the cork on insolvencies by allowing companies to trade while insolvent. If that cork is released on schedule at the end of next month there will be an avalanche of insolvencies. APRA has allowed banks to pay half their profits in dividends, but that decision was made before the Victorian lockdown.

I know the vast Australian retirement community will look in horror at any change, but APRA needs to look closely at whether that decision endangers the banking system.

And it has to move quickly because next week the Commonwealth Bank is due to announce its profit and dividend for the year ended June 30. The other three major banks balance on September 30 so their profits are not due out until October, by which time we will have a better grasp of what has taken place.

The worst possible situation is the banks pay out dividends from “profits” that are a mirage because bad debts have been substantially underestimated. If that happens big capital raisings at discounted prices will be required.

Moreover, the number of businesses and consumers that are delaying loan payments is so huge, that it goes beyond the ability of banks to expertly assess the real situation.

Compounding the longer term danger, it is clear that the Victorian quagmire of regulations, human rights legislation and multi levels of public service responsibility mean it can’t operate a partial shutdown along the lines of the other states.

Hopefully it might be able to operate a total shutdown with the help of the disciplined Australian defence forces. In effect we are simply waiting for a vaccine.

The great problem yet to be faced around the nation is that businesses that were once profitable but are now incurring losses are mounting up debts. They may not be able to generate the cash in the future to service those debts. Moreover, being a crippled business makes you very vulnerable to challenge from young enterprises and new ideas. There is no easy solution but first and foremost we must hold the banking system together.

However Australia wide, prior to the Victorian shutdown there were signs that a great many enterprises were starting to cope. Almost certainly JobKeeper rules will be relaxed in reaction to the Victorian crisis, which will help this recovery trend in all states apart from Victoria.

One of Australia’s leading official administration groups, FTI Consulting points out that the lower level of official administrations in the April-May period was dominated by construction enterprises which took some 20 per cent of the total, dominated by housing .

The CFMEU heavied the Victorian government very hard to get lock down exemption for big commercial building contracts. Not unexpectedly, given the power of the CFMEU they were partly successful, but limited housing is also allowed. But the carnage already taking place in construction will be multiplied. We will need big situmulation when the shutdown is completed.

Also lobbying hard was Bunnings, which realised in Melbourne it would have to shut for retail customers if Daniel Andrews continued with the policy he announced on Sunday.

Bunnings argued that its multitude of suppliers, which include many Australian manufacturers would be hit hard if the Melbourne stores had to shut. Similar arguments would have been put forward by the appliance and other retailers. They all lost and the shutdowns continued as announced.

Of course Bunnings has developed a substantial online operation which has been scoring above Amazon. One the consequences of the Victorian lockdown will be a further boost to online and click and collect retailing, which will further diminish the value of bricks and mortar stores.

After construction the second biggest area of official administration is, of course, accommodation and food. However a great many restaurants and take away food operations around Australia are among those devising ways to at least tread water and pay the bills. But in Victoria the lockdown and the end of any restaurant trade in the CBD means there will be more carnage in this area

Sadly many CBD landlords are still pressing for high rents even though there’s no one to sell to. Overseas and interstate tourists have gone; workers can have longer come to the city. It’s a total waste land. Many of those landlords are also borrowed heavily and are petrified that lower rents will create negative equity.

When it comes to health, Australia-wide the system is still intact. I think the Victorians now understand what’s required and hopefully all other states can learn from Victoria’s mistakes. Strangely our greatest danger may be in Queensland, where some Queensland hospital managers actually firmly demand that their nurses, including those in intensive care, not - repeat not - wear masks.

It’s based on the dangerous belief that “we are Queenslanders” and the virus would not dare to cross the border and invade the sunshine state so there’s no need to take the sort of precautions used in other states.

I don’t know from what level in the Queensland bureaucracy this instruction emanates but ultimately the Queensland Premier must take responsibility for this total madness. The virus has now defied the hospital managers’ declaration and entered Queensland.

In Victoria, Australian soldiers and their discipline will hopefully help.

I would like Health Minister Greg Hunt and Defence Minister Linda Reynolds to study whether the anti-malaria drug hydroxychloroquine, used in conjunction with zinc, can curb COVID-19 if taken in its early stages.

The peer-reviewed US Henry Ford Health System concluded that hydroxychloroquine was a potential game-changing treatment. In the UK the Oxford people took the reverse stance. In June, the US Food and Drug Administration revoked its emergency-use authorisation for hydroxychloroquine for the treatment of COVID-19, saying it was “no longer reasonable to believe” it “may be effective in treating” coronavirus.

Meanwhile the whole exercise has got mixed up with President Trump’s stance so naturally Victoria takes the anti-Trump line.

I don’t know who is right and who is wrong but if hydroxychloroquine and zinc can be used in the early stages of COVID-19 to reduce the impact on healthy people then we should use it to keep our soldiers on active service. Remember this is a very well-tested old drug and any side effects are known.

Meanwhile we await the details’ of how the Victorian business shutdown will work.