The Big Four Banks surge on APRA’s updated dividend guidance

We examine the implications of APRA’s latest piece of regulatory guidance, specifically as it relates to potential bank dividend payments.

ANZ, CBA, NAB and Westpac dividends remain in focus

The Australian Prudential Regulation Authority (APRA) today provided updated guidance for Authorised Deposit Taking Institutions (ADIs) around capital management expectations.

This builds on and replaces the guidance that APRA provided to ADIs in March – where it was noted that the expectation was for banks to ‘seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.’

Many of the big four banks did indeed defer or reduce their dividends in response to that guidance as well as the economic uncertainty brought on by the coronavirus pandemic. Looking at these decisions briefly:

  • ANZ deferred its interim dividend, citing the need for greater clarity on the economic impact of the coronavirus before their payment may resume.
  • Westpac also deferred its interim dividend, though the bank’s Board noted that it 'will continue to review dividend options over the course of this year.’
  • NAB, by comparison, paid a fully-franked, though heavily reduced, interim dividend of 30 cents per share.
  • Finally, while CBA has yet to defer or suspend its upcoming final dividend, investors are likely eager to gain further visibility on the bank’s dividend plans when CBA unveils its full-year results on 12 August.

Updated regulatory guidance turns investors bullish

Looking at the key aspects of APRA’s updated capital management guidance, the regulator on Wednesday noted that bank dividends should not exceed a payout ratio of 50%. As was the case in April, the regulator further noted that where possible, ADIs should make use of dividend reinvestment plans or other initiatives.

Investors interpreted this news as bullish for the banks. Indeed, by 2:33PM (Canberra time), the share prices of Australia’s big four banks all traded significantly higher: ANZ surged 2.77%, NAB rose 2.18%, Westpac gained 1.88% and CBA was up 1.38%.

Speaking of these measures in more detail, APRA’s chair, Wayne Byre noted that while risk remains, the last few months have provided the regulator with clarity around how Australia’s financial firms have been impacted by the pandemic. Because of this, it was pointed out that:

‘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.’

Besides the expectation that distributions would come in below 50% of bank earnings, the regulator also expects that the banks will continue to lend to households and businesses – as a means of supporting Australia’s economy during these uncertain times. It is also expected that ADIs will conduct regular stress testing, to ensure that they are able to provide these lending services.

Mr Byres finished by saying that ‘The years spent building up the capital strength of Australia’s banking sector to historical highs have been precisely for a time such as this.’

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