Banks told by APRA to restrict dividend payouts

Bank shares jump as regulator eases its April clampdown, but APRA says banks should keep dividend payout ratios to below 50pc.

Australian Prudential Regulation Authority (APRA) chairman Wayne Byres.

The Australian banking regulator has told banks they should restrict dividend payments to no more than 50 per cent of their earnings for the rest of the calendar year to maintain balance street strength in the face of the slowing economy.

While the Australian Prudential Regulation Authority has moved to partially ease the clampdown on dividend payouts it imposed in April, it is maintaining the need for caution.

The move comes as concerns over the banking sector rise, with increasing unemployment expected to trigger high levels of lending losses, while the economic slowdown will also hit business loans.

Still, there was relief from investors, following fears that APRA’s recommendation of a suspension on dividends could last through this reporting season.

At 10.40am (AEST) shares in Commonwealth Bank were up 1.6 per cent, Westpac was up 1.3 per cent, ANZ was up 2.3 per cent and National Australia Bank up 2.1 per cent.

In addition to the revised advice on dividends, APRA recommended that the banks “conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity” and “make use of capital buffers to absorb the impacts of stress, and continue to lend to support households and businesses”.

APRA Chair Wayne Byres said the updated guidance struck a balance between the need for banks and insurers to support households and businesses while remaining cautious in the face of 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.

“On that basis, APRA believes that banks and insurers do not need to continue 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.

“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 will be maintained below 50 per cent for this year.”

The comments come as several banks including Commonwealth Bank and insurers have just ruled off on their accounts for the end of June. Three of the big four – ANZ, NAB and Westpac – sign off on their final dividend at the end of September.

While APRA‘s limit of 50 per cent limit on earnings to be paid as dividends compares to the usual payout ratio for banks of between 60 and 80 per cent, it does provide some easing of APRA’s tough stand in April when it said that banks and insurers “seriously consider deferring decisions“ on the appropriate level of dividends until the outlook is clearer.

Prior to that guidance being issued, Commonwealth Bank paid out a $2-a-share interim dividend in March.

ANZ Bank deferred its half-year dividend in late April, saying the board was likely to determine its final position on August 19.

Westpac deferred its interim distribution in May awaiting the arrival of its Pillar 3 report is due on August 18.

National Australia Bank slashed its interim dividend by 64 per cent, from 83c to 30c in April.

Mr Byres said the advice on dividends and the utilisation of capital buffers will help the banks absorb potential losses.

“The years spent building up the capital strength of Australia’s banking sector to historical highs have been precisely for a time such as this. Further, APRA is committed to ensuring any rebuild of capital buffers, if required, will be conducted in an orderly manner,” Mr Byres said.

Analysts are concerned over the banks’ exposure to deferred loans.

Australia’s banks have in total approved more than $266bn worth of loan repayment deferrals to help customers impacted by a drop in income through the COVID lockdowns.

This represents some 10 per cent of all loans, according to the APRA data, with the bulk of requests flooding in through April before tapering off in May.

While banks will extend some loan deferrals into early next year, they are also working with some customers to resume paying loans.