The deferral of bank dividends may be a long-lasting policy Wayne Byres, the APRA chief, suggested yesterday.
“We hope the impact on dividends from the current COVID-19 crisis will be temporary, but obviously the outlook remains highly uncertain,” Byres told an online FINSIA Forum.
“For that reason, we firmly believe prudence is the appropriate strategy for the time being. Our approach is designed to underpin financial system stability over the longer term, which ultimately benefits all Australians.”
APRA wrote to banks and insurers in early April asking that they consider deferring, or at least materially reducing, discretionary capital distributions in the months ahead, which some banks have done.
“I want to stress we did not intervene on dividends lightly. We recognise the important role they play in the investment returns of many Australians,” Byres said.
“However, our mandate is first and foremost to protect the safety of bank deposits and ensure insurers have the means to pay claims.”
Byres pointed out that “bank capital ratios have been at historical highs” in Australia before the pandemic arrived.
“That capital has been built up precisely so that banks are able, in times of stress, to absorb losses and sustain the flow of credit to the broader economy. Now is the time to allow that to happen,” he said.
“It means capital ratios will come down over the year ahead …. major bank CET1 ratios below 10 per cent again are to be expected.
“As that occurs, we need to keep it in perspective: less than three years ago, the aggregate major bank CET1 ratio had never been above 10 per cent.
“Our message to make use of capital buffers to support economic activity has not, though, been without strings attached. Capital can essentially be used for three purposes: to sustain and grow the business, to absorb losses, or to reward shareholders.
“We prefer capital buffers utilised for the first two,” he said.