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APRA tells banks to limit dividends

The Australian Prudential Regulation Authority (APRA) has instructed Australia’s banks to hold far greater than expected capital reserves, which will limit dividend payments to shareholders. This is consistent with a report by the International Monetary Fund (IMF) in November 2012, calling for Australia’s largest four banks to raise billions of dollars in extra capital. The rationale is that should any systematically important institutions face protracted difficulties, the entire financial system would be at risk.

In the firing line will be special or extra dividends in the current bank reporting season, according to a report in the Australian Financial Review. This could be a major blow to bank shareholders, as both existing high dividend yields and the prospect of bonus capital returns have inspired the sustained appreciation in share prices.

APRA’s role is to regulate deposit-taking institutions and chairman John Laker will adhere to international precedents and force Australia’s “too big to fail” institutions to comply. By implication, these new capital buffers are aimed at Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), ANZ (ASX: ANZ), Macquarie Group (ASX: MQG) and Westpac (ASX: WBC).

For Westpac, analysts had expected a 10 cent per share special dividend, to follow on from the same last May. Additionally, chief executive Gail Kelly had explicitly held out the prospect of additional future special dividends.

Foolish takeaway

There is no other way to interpret the above as anything but a blow to bank shareholders. This Fool suggests that dependent on individual circumstances some trimming of exposures to the banks may be appropriate until the picture is clearer.

This of course requires a review of your weighting of banks in your overall share portfolio and any material risks to your overall returns. Others may see this as an opportunity to hold and increase their holdings at lower prices.  After all, one man’s meat may be another man’s poison.

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

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