APRA has notified authorised deposit-taking institutions that from the start of next year it will no longer require a minimum level of earnings retention, freeing the banks to return to higher dividend payout ratios.
In July, the regulator told ADIs 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.
APRA said that since July there has been an improvement in the economic outlook and bank capital and provisioning levels have strengthened.
“In determining the appropriate level of dividends, APRA expects ADIs and insurers to remain vigilant, regularly assess their financial resilience through stress testing and undertake a rigorous approach to recovery planning,” it said.
APRA said its decision was informed by stress testing since the onset of the pandemic.
“The tests indicated that Australia’s banking system could withstand a very severe pandemic and continue to support the economy by supplying credit to households and businesses.”
The regulator’s severe downside scenario involved a 15 per cent fall in GDP and rise in unemployment to over 13 per cent, a 30 per cent fall in house prices and a 40 per cent fall in commercial real estate prices.
Under such a scenario, if the banks took no mitigating action the common equity tier capital ratio of the banking system would fall by 5 percentage points, from 11.6 per cent to 6.6 per cent.
APRA said this remains above the 4.5 per cent minimum CET1 requirement and does not factor in mitigations actions.
The big banks suffered the biggest fall in CET1 capital under the stress test – down a little more than 5 percentage points – followed by credit unions and building societies (down around 4.5 percentage points), foreign subsidiary banks (4 percentage points) and other domestic banks (around 3.5 percentage points).
If the severe downside scenario persisted for three years, the banking industry would report total losses of A$45 billion. APRA said the industry could sustain that level of losses and still have the capacity to absorb a further $48 billion in economic stress before hitting its minimum capital requirement.
APRA said the fall in the CET1 capital ratio under its severe downside scenario is of a similar magnitude to stress tests undertaken by peer regulators in response to the pandemic.
The severe downside scenario assumed there was no reduction in aggregate lending during the period of stress.
“Banks can maintain resilience while continuing to lend to businesses and households during a severe downturn,” APRA said.