The Australian Prudential Regulation Authority (APRA) said today that restrictions to bank dividends will end from 2021.
You see, once COVID hit earlier this year, and Australia was facing lockdowns and mortgage deferrals, APRA sent a letter to banks and insurers. In it, APRA said it expected them to ‘seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer’.
In July, APRA eased its stance a bit, telling banks and insurers they could start paying out dividends, but that they should keep at least 50% of their earnings.
Westpac, for example, suspended its interim dividend and will be paying a final dividend of 31 cents per share for the year — way less than the $1.74 it paid last year.
No dividend restrictions next year
Today, with the economy improving, APRA lifted its recommended guidelines on bank dividends. It said it won’t ask banks and insurers to keep a minimum amount of earnings next year…although risks remain.
In the words of APRA:
‘Since July, there has been an improvement in the economic outlook, bank capital and provisioning levels have strengthened, and the majority of loans that were previously granted repayment deferral have recommenced repayments. However, a high degree of uncertainty remains in the outlook for the operating environment.
‘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.’
However, share prices for all the big four banks were down after the announcement. At the time of writing, Commonwealth Bank of Australia [ASX:CBA] is down 1.12%, National Australia Bank Ltd [ASX:NAB] dropped 0.91%, Westpac Banking Corporation [ASX:WBC] is down 0.85%, and Australia and New Zealand Banking Group Ltd [ASX:ANZ] is down 1.14%.
It’s likely because the announcement was already priced in, since APRA had flagged this as something it was considering about a month ago, and shares for the big four rallied back then.
What could happen next?
While this is good news, it’s likely banks may struggle in the future.
For one, Australian banks are very exposed to housing, with 60% of their loan totals made up of home mortgages, and we still need to see what will happen when JobKeeper ends next year.
But also, long-term low interest rates aren’t great news for banks.
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