APRA has warned banks to reduce their dividends, raising fears that income investors could still be hit hard despite payouts going ahead.
APRA has updated its capital management guidance for banks and insurers, saying Australia’s financial system is well positioned to withstand a severe downturn and easing restrictions around paying dividends. The guidance replaces its recommendation in April this year that banks and insurers “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”.
“Today’s announcement strikes a balance in recognising the strength of the financial system, while at the same time acknowledging the difficult path ahead,” said APRA chairman Wayne Byres. “Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by COVID-19.
“On that basis, APRA believes that banks and insurers do not need to continue to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy.”
However, due to the additional challenges to capital resilience – including loan repayment deferrals, the financial impact of COVID-19, and restrictions on dividends from institutions’ New Zealand operations – APRA expects dividend payout ratios for authorised deposit-taking institutions to be maintained below 50 per for this year.
“It must be remembered that a 50 per cent payout ratio is substantially lower than the normal bank payout ratio, and with bank profits likely to fall due to bad debt provisions, investors will probably still need to look outside the banks for income,” said Dr Don Hamson, managing director of Plato Investment Management. “I now encourage the banks to listen to the regulator’s latest guidance and resume paying out a level of dividends that won’t leave investors in the lurch.”
In 2019, Plato estimated that the big four banks paid 30 per cent of gross dividends, including cash dividends plus franking, of the entire S&P 500.
“It’s clear the cuts to bank dividends thus far, since the outbreak of COVID-19, have destroyed the income stream of thousands of retirees and other investors,” Mr Hamson said.