Banks and insurers have been asked to retain at least half of their earnings while deciding dividends until December, after APRA issued revised guidelines.
The prudential regulator in April asked banks and insurers to consider deferring dividend decisions until COVI-19's impact was clearer.
On April 16, UBS estimated total dividends from ASX-listed companies could fall from over $70 billion to $50.7 billion.
Updating its capital management guidance for the segment this morning, APRA eased the April restrictions a little but is asking banks and insurers to seek to retain at least half of their earnings when making decisions on capital distributions.
|Sponsored by Insight Investment|
Towards a perfect currency solution
It is also asking them to use dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible.
APRA also wants banks and insurers to conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity and make use of capital buffers to absorb the impacts of stress, and continue to lend to support households and businesses.
Commonwealth Bank, for example, currently targets 70% to 90% full-year dividend payout ratio. Last year, the big four banks accounted for about 30% of total dividends paid by S&P 200 stocks, on a gross basis including cash dividends plus franking, according to Plato Investment Management's estimates.
"Today's announcement strikes a balance in recognising the strength of the financial system, while at the same time acknowledging the difficult path ahead," APRA chair Wayne Byres said.
"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."
"...In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from COVID-19, and restrictions on dividends from their New Zealand operations. APRA has therefore set an expectation that dividend payout ratios for ADIs will be maintained below 50 per cent for this year."
Plato Investment Management managing director Don Hamson said the latets guidance was an improvement but banks need to resume paying dividends.
"APRA's latest guidance is somewhat of a relief for retirees who rely on bank dividends to make ends meet," Hamson said.
"However, it must be remembered that a 50% 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."
"In its previous statement in April, APRA discouraged banks and insurers from paying dividends, causing ANZ, Bank of Qld and Westpac to defer their interim dividends with NAB cutting its dividend by 64%.
"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."