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Banks cautioned to limit dividends ahead of earnings reports

With Westpac (ASX: WBC), ANZ (ASX: ANZ) and NAB (ASX: NAB) all set to close their accounts for the year on Monday, the Reserve Bank of Australia (RBA) has issued a warning to not increase dividend payouts substantially in case of a downturn in the economy.

When Commonwealth Bank (ASX: CBA) reported on its performance for the year ended 30 June 2013, it recorded a record profit of $7.68 billion, and it is expected that the remaining three major banks will also report record results. Westpac’s profit is forecast to be $7.1 billion, ahead of ANZ’s and NAB’s expected annual results of $6.4 billion and $6 billion, respectively.

Shareholders have been pressuring for higher dividend payouts, however, the RBA has warned the banks to think again if such a move would reduce the reserved money kept as security against a crisis. The RBA said, “In considering potential actions, banks need to ensure that their internal capital buffers are sufficient to cope with stressed situations.”

Despite the warning, some analysts are anticipating that the three banks will increase their full-year payouts by between 6% and 9%. It is anticipated that Westpac could also offer its shareholders a special 10c per share dividend, just as it did when it reported its half-year results earlier this year.

The warning comes from the RBA, however the Australian Prudential Regulation Authority (APRA) has also cautioned the banks against relaxing their lending standards as a way of competing for more customers or increasing their revenues.

Foolish takeaway

When Commonwealth Bank reported its full-year results, it did not announce a special dividend to investors, which saw the share price fall. Whilst the bank could certainly have afforded to distribute a greater amount, such a decision would have pushed capital levels down close to the minimum required by APRA.

Although the banks will want to please their shareholders, it is vital that they also consider the risks facing the economy and reserve enough money in case of a downturn, or in case APRA increases the minimum required reserve amount.

The banks have pushed up in value substantially and, despite  their offering of high dividend yields, look unlikely to outperform the market in the long-term. Instead, discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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

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