The Australian Prudential Regulation Authority has told authorised deposit-taking institutions they should retain at least half their earnings and actively use dividend reinvestment plans or other capital management initiatives to offset the diminution of capital from distributions.
In an update to its Covid-19 capital management guidance yesterday, APRA has ever-so-slightly moderated its stance on how ADIs should handle dividend payments and other discretionary capital distributions during the crisis.
After telling ADIs in April that they should limit discretionary capital distributions (including reductions in dividends) to ensure they maintain capacity to continue lending, APRA updated its guidance yesterday, telling ADIs that they should “moderate dividend payments to sustainable levels”.
The big banks have been reviewing their dividend policies in recent times but, based on the requirement to retain half their earnings, all of them will have to make further revisions to their policies.
At the half year, Commonwealth Bank paid an interim dividend of A$2 a share – unchanged from the previous corresponding period but down from the $2.31 a share final dividend for the June half last year. The payout ratio was 78.8 per cent of cash earnings.
CBA’s payout ratio in 2018/19 was 87.6 per cent.
NAB paid an interim dividend of 30 cents a share – down from 83 cents in the previous corresponding period. The payout ratio was 61 per cent. The bank’s payout ratio in 2018/19 was 91.1 per cent.
Westpac and ANZ deferred their decisions in interim dividends.
Last financial year, Westpac “reset” its dividend, reducing the payout ratio from 98 per cent in the first half, when it paid 94 cents a share, to 79 per cent for the second half (when it paid 80 cents).
ANZ paid out a total of $1.60 a share in dividends in 2018/19. The payout ratio was 70.1 per cent.
APRA said that over the three months since it released its initial guidance, it has assessed the banking industry’s resilience to a range of stress scenarios.
“It is clear that the banking system is well positioned to withstand a severe downturn but it would be severely impacted if such a scenario unfolded. There is, therefore, a need for continued vigilance and careful planning,” APRA said.
It said banks should use their capital buffers if needed and that they are not expected to meet unquestionably strong capital benchmarks in the period ahead.
It wants ADIs the conduct regular stress tests and it should build “positive loan growth assumptions” into their models. “Reductions in credit supply should not be relied upon to meet internal stress testing benchmarks.”