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NAB may have to reassess dividends

Given that the Australian Prudential and Regulation Authority’s (APRA) new rules are expected to require Australia’s banks to hold around 1-1.5 percentage points in additional capital reserves, NAB (ASX: NAB) has admitted that it may have to reassess its dividend payment plans.

NAB reported a full-year profit of nearly $6 billion yesterday and said that it would increase its final dividend to 97c per share. Meanwhile, it also said it would buy back shares in order to neutralise the impact of new stock issued under its dividend reinvestment plan.

However, the bank has acknowledged that it will need to reassess its “capital management” strategy once APRA’s new rules are finalised. APRA’s new rules, which will be outlined by the end of the year and will apply as of January 2016, will require Australia’s five biggest banks — NAB, Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ), Westpac (ASX: WBC) and Macquarie Group (ASX: MQG) — to hold a combined $15 billion extra in reserve.

The rules that are being applied are consistent with a report prepared by the International Monetary Fund that stated that Australian banks, which are considered to be “too big to fail”, should hold extra capital in case of a major financial downturn.

In response to questions regarding the new rules, NAB’s CEO Cameron Clyne said “As we sit here today, there is absolutely nothing that changes our view on capital or plans to neutralise the dividend (reinvestment plan)… Of course that could change, but there is nothing standing here in front of us today.”

Foolish takeaway

Whilst the banks’ rally over the last 18 months or so has largely been driven by the prospect of high dividend yields and potential bonus capital returns, their shares were sold off heavily by the market yesterday following the news. In order for the banks to be able to build their capital, yields could be at risk in the short- to medium-terms.

Until more clarity is given regarding the pending new rules, it may be a good idea for investors to limit their exposure to the banks or consider alternative investment opportunities.

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

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