Kiwi clamps unlikely for our banks

The prudential regulator is unlikely to following the RBNZ’s lead and ban Australian banks from paying dividends, analysts say.

Analysts have downplayed the prospect of the prudential regulator following the lead of the Reserve Bank of New Zealand and banning the major banks from paying dividends or redeeming capital instruments during the coronavirus pandemic.

The Reserve Bank of New Zealand made the order last week to support the stability of the New Zealand banking system during the coronavirus pandemic. Each of Australia’s big four banks also own substantial operations in New Zealand, prompting fears that they would be prevented from channelling profits back home and hurting their ability to boost capital.

Of the Australian banks, ANZ has the biggest exposure to New Zealand with nearly 20 per cent of its risk-weighted assets there, while Commonwealth Bank has the smallest in terms of its risk-weighted assets.

Citi said in a note that almost all of the capital supporting the NZ financial system was provided by the major Australian banks, leaving local investors unaffected by the RBNZ move.

“This decision enables the RBNZ to build a capital reserve in the event COVID-19 evolves into an existential banking crisis,” Citi said. “Many investors are looking to see if APRA will adopt a similar approach.

“However, we think a similar decision remains unpalatable at this time, given the $25bn in bank dividends plus $10bn in franking credits that would be removed, largely affecting self-funded retirees’ consumption requirements.”

Also, with the Reserve Bank cash rate 0.25 per cent, there were no alternative assets to provide income for consumption.

Any move to follow the RBNZ would require an additional fiscal policy fix, Citi said.

The investment bank said the big four were likely to respond by bringing forward their dividend cuts to May, knowing that the payouts were likely to be cut in the second half of the financial year because of higher bad and doubtful debts.

JPMorgan said the impact for the sector would be felt on its level 1 common equity tier 1 ratio, ­although APRA had already indicated that it would be prepared to allow some erosion in the banks’ capital ratios to deal with the coronavirus crisis.

The major banks’ dividend payout ratios could also be capped.