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APRA warns banks over dividends

Australia’s major banks have been on the radar of the Australian Prudential Regulation Authority (APRA) this week, having been issued with two separate warnings regarding lending standards and dividends being paid to shareholders.

Earlier in the week, it was announced that APRA had warned the banks against relaxing their mortgage lending standards so as to protect against a situation similar to the sub-prime crisis that sparked the global financial crisis. With interest rates sitting at an all-time low and competition between the banks heightening, it has been feared that lending standards could be relaxed in order to capture more customers.

Now, as reported by The Australian Financial Review, the regulator has set its sights on the dividends being paid by the banks, warning against unnecessarily depleting capital reserves to appease shareholders’ demands.

The low interest rate environment has seen investors flock towards high-yielding stocks, which has also driven up the value of the banks’ shares. On the back of record profits, Commonwealth Bank (ASX: CBA) raised its annual dividend to a record $3.64 whilst ANZ (ASX: ANZ) and NAB (ASX: NAB) bought back shares to increase shareholder value. Meanwhile, Westpac (ASX: WBC) also paid shareholders a special dividend.

Prior to the Commonwealth Bank releasing its full-year report last month, it was heavily anticipated that the corporation would announce a special one-off dividend of its own, considering their record-breaking profit. However, the bank refrained from doing so, opting to maintain a conservative approach to managing its capital in case of a downturn in the economy.

Foolish takeaway

APRA said “Capital initiatives need to be carefully considered by ADI’s (authorised deposit-taking institutions) to ensure adequate buffers are built and maintained.” Whilst the regulator recognises that the banks have adequate capital buffers, it was vital that they are able to be sustained well into the future.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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