The statement comes as seniors and shareholder groups argue any suspension of dividend payouts along the lines proposed in Europe would force hundreds of thousands of self-directed investors who rely on dividend income onto the welfare state.
APRA said Australia’s banks “remain well capitalised”. However, it has advised banks it expects them to “prudently manage their capital, and ensure their actions in the foreseeable future are consistent with their ability to provide ongoing credit support to the broader economy”. The regulator added it “continues to monitor these issues and may review its guidance on these issues as circumstances evolve.”
Geoff Bascand, RBNZ deputy governor: “This initiative further supports the stability of the financial system by maintaining higher levels of capital during the period.” Louise Kennerley
Blow to retirees
Investors are already expecting the decline in banks profits as bad debts rise to naturally lead to a reduction in bank dividends later this year but representatives of retirees say aggressive cuts would be harmful to retirement incomes. Dividends paid out by the major banks account for 32 per cent of the dollar value of dividends paid by ASX companies.
“Many older Australians, especially those who were not part of the super system, rely on dividend income from blue chip stocks,” said National Seniors Australia chief advocate Ian Henschke.
“We would be concerned that this older cohort will get hit hardest by bank dividend cuts. This came to light in the franking credit debate; we heard from lots of people in their 80s, saying dividends on blue chips provide a large slice of their income.”
Fiona Balzer, policy manager at the Australian Shareholders Association, said she hoped Australian regulators would not take the kind of action seen in Europe to suspend bank dividends “without seriously considering the implications”.
“The banks need to maintain solvency and adequate capital, of course, but we need to remember that our economy is so interrelated. Bank dividends are precisely the sorts of dividends that people are relying on to cover their living expenses,” Ms Balzer said.
Senior regulators and bank executives in Australia have held private talks to plan for how banks can continue to pay dividends if the recession bites hard. APRA has the power to direct banks to reduce or suspend their dividends, but it is cautious about using it.
Fiona Balzer is the Australian Shareholders Association policy manager: “Bank dividends are precisely the sorts of dividends that people are relying on to cover their living expenses.” Jim Rice
Sources said APRA is aware of the pressure dividend cuts will put on savers, already suffering from low official interest rates, and is also conscious aggressive action on dividends could hit bank equity prices, making it more expensive for banks to raise additional equity if they need it.
Were dividends to be suspended, Ms Balzer estimated hundreds of thousands of self-directed investors could be forced onto the welfare state, to make up for the lost income in the form of franked dividends.
“They may need to sell off investments and make up any shortfall by going onto the pension,” she said. Even those investors who are not forced onto the pension may need to “hunker down” and reduce consumption, which would have an adverse affect on the broader economy.
Financial system stability
Commonwealth Bank responded to the RBNZ via an ASX announcement saying it is well capitalised, holding “level 1” CET1 of 12.1 per cent.
“The strong level 1 surplus capital position means CBA is well placed to absorb the suspension of ASB dividends,” CBA said.
ANZ said the RBNZ decision will prevent its NZ subsidiary “from redeeming its $NZ500 million [$488 million] capital notes on May 25, 2020, although it is able to continue to make interest payments on those Capital Notes”.
It said conversion would increase its CET 1 capital ratio by about 12 basis points at level 2 and more information will be made available to NZ noteholders “in the near future”.
Ms Balzer welcomed CBA’s statement it would be able to “absorb” the RBNZ edict and hoped the other major banks would follow suit.
RBNZ said the restrictions take effect from Thursday and will remain in place until “the economic outlook has sufficiently recovered”.
Geoff Bascand, RBNZ’s deputy governor, said on Thursday morning the central bank wanted to “further support the stability of the financial system during this period of economic uncertainty” and had “agreed with the banks that during this period there will be no payment of dividends on ordinary shares, and that they should not redeem non-CET1 capital instruments.
“This initiative further supports the stability of the financial system by maintaining higher levels of capital during the period of falling economic activity resulting from the COVID-19 pandemic,” he said.
National Australia Bank said it “does not anticipate that this restriction on the payment of ordinary dividends by BNZ will have a material impact on NAB’s Level 1 capital position”, while Westpac said non-payment of dividends from its New Zealand subsidiary will affect its Level 1 CET1 capital ratio.
New capital rules delayed
RBNZ’s move follows restrictions on dividends being paid out to shareholders implemented in the past week by the European Central Bank and earlier this week by the Bank of England.
On Tuesday night, the six largest British banks – Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered – bowed to pressure from the Bank of England and said they would cancel their dividends for 2019 and not carry out any share buybacks.
The European Central Bank also ordered banks in the eurozone to freeze dividend payments until at least October.
British bank shares fell hard on Wednesday, after the Bank of England warned banks against paying out dividends, forcing them to respond by stopping payments to shareholders and not putting aside funds for returns this year. HSBC shares fell by more than 8 per cent on Wednesday.
Banking analysts are already expecting the Australian banks to cut dividends this year. For example, Citi reckons per share dividends will be cut later this year by 18 per cent at ANZ to $1.30, 15 per cent at CBA to $3.65, 10 per cent at NAB to $1.50, and 18 per cent at Westpac to $1.30. Evans & Partners has previously warned investors to prepare for dividend cuts of at least 50 per cent.
Some analysts were already expecting dividends from the NZ subsidiaries to the Australian parent banks would slow significantly, in response to the need to build up capital at the subsidiary level to meet the RBNZ’s capital rules – which the RBNZ has delayed by 12 months until July 1, 2021.
The RBNZ move came inside the announcement of a new longer-term funding scheme for the banks to support the NZ government’s business finance guarantee scheme to help promote lending to businesses.
APRA and the RBA have both said local banks are in a strong position to ride out the crisis. APRA has already given the green light to the big banks to reduce their “unquestionably strong” 11.5 per cent Tier 1 common capital ratio to help the banks act as a “shock absorber” for the economy.
APRA may also need to temporarily allow the regional banks to fall below their prudential capital ratio (PCR) floors of about 10 per cent.
The big four banks and Macquarie were forced to raise more than $50 billion in extra equity capital over the past five years to be in the world’s top quartile of capitalised banks, to help protect taxpayers and depositors from bank bailouts.
APRA chairman Wayne Byres wrote in The Australian Financial Review on Monday that: “Achieving a stronger capital position has not been an end in itself; it has been built up for a purpose. APRA’s objective in building up the capital strength of the system has been to ensure it is available to be drawn upon if needed in times such as this.”
But Britain’s Prudential Regulatory Authority wrote to British banks on March 31, ordering them to suspend dividends and buybacks on ordinary shares until the end of the year and said it was also expecting a cessation of bonuses to senior staff and material risk takers.