Bank dividends: it's a deferral not a cancellation

John Kavanagh
Industry commentators expect banks to defer rather than cancel dividends, in response to APRA's call for them to limit capital distributions. And some may play catch-up with special dividends.

On Tuesday APRA issued a statement saying it expects ADIs and insurers to limit discretionary capital distributions, including dividends, "in the months ahead" to ensure they maintain capacity to continue lending and underwriting insurance.

It wants ADIs to use stress testing to inform their views about their need to preserve capital. In its most recent stress test, APRA used a worst case scenario of a 35 per cent drop in house prices and an increase in unemployment to 11 per cent.

"During this period, APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer," the regulator said.

Macquarie Securities said it expected banks to reduce or entirely suspend their upcoming dividends because "under the stressed scenario banks need to largely eliminate dividends and potentially raise capital".

Macquarie said: "We believe banks remain well above their conservation buffers and APRA's actions are pre-emptive.

"We suspect banks are likely to choose to suspend their dividend and look to reinstate them (and possibly pay special dividends) if conditions normalise.

"We estimate that CBA should be able to sustain a reduced dividend in the stressed scenario."

Coolabah Capital co-chief investment officer Christopher Joye said: "I expect one of the majors to potentially defer its half-yearly dividend to focus on prudently building capital, while the two others that report soon will probably pay a substantially reduced distribution.

"CBA is carrying massive excess capital of A$4 billion and can be counted on to distribute a reasonable dividend following the end of its full year in August, especially considering the hundreds of thousands of retirees who hold bank stocks for their attractive yields."

In response to APRA's announcement, Macquarie Group said it had a capital surplus of $5.3 billion at the end of December and Macquarie Bank had a tier 1 capital ratio of 12.7 per cent.

NAB said it would take APRA's guidance into account when it considers its interim dividend settings as part of the half-year results process.

Westpac said no decision had been made by the board in relation to its March half dividend.

ANZ and CBA did not respond to APRA's announcement.

Bank of Queensland released its half-year results yesterday and during the investor presentation chief executive George Frazis said: "We recognise the importance of dividends to shareholders. However, APRA's expectation is for lower dividends.

"It is a deferral not a cancellation. We have to go through the stress test and then we will have clarity. It will be below the bank's target payout ratio of 70 to 80 per cent of profit."

BOQ amended its dividend reinvestment plan, removing the 1.5 per cent discount hat had applied.