The Australian Prudential Regulation Authority (APRA) has sent a letter asking ASX banks to materially reduce their dividends during the coronavirus outbreak.
It wasn’t just the ASX banks to receive the letter, it was also other authorised deposit-taking institutions (ADIs), life companies, health insurers and general insurers.
This is clearly going to affect plenty of ASX shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Bank of Queensland Limited (ASX: BOQ) and Suncorp Group Ltd (ASX: SUN).
According to reporting by the AFR, APRA expects that any dividends that may be paid should be materially reduced and only be paid after strong stress testing and with consultation from APRA. However, it hasn’t gone as far as New Zealand or European regulators which have stopped bank dividends during this period.
APRA said: “limit discretionary capital distributions in the months ahead to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance.”
The regulator wants to make sure that banks can continue to lend to prospective borrowers and keep the public’s confidence.
But it’s not just shareholders that are expected to play their pay in maintaining the system. APRA also said it expects the banks to limit cash bonuses for management during this period. Management of travel businesses have taken major pay cuts.
APRA has suggested that the ASX banks could offer dividend re-investment plans with attractive discounts as another way of raising capital,
What does this mean?
It well it seems that the big yields offered by the four ASX banks are indeed yield traps for now, but that shouldn’t change the underlying value of the banks. Indeed, keeping more cash could improve the value of ASX banks because they’re less likely to run into real trouble which may be priced in a little by the market.
There’s a reason why the share prices of NAB and Westpac are trading at close to GFC-lows. But it also doesn’t mean that bank dividends will be lower forever.
Are ASX banks are a buy?
Banks are in a tough spot at the moment. They’re being asked to take a lot of the economic pain. They’re going to give borrowers payment holidays. And banks are also going to see lower net interest profits because of the lower RBA interest rate.
If you take a 5-year or longer view then the ASX banks could be quite attractively priced. But I much prefer the idea of buying some shares that have also fallen heavily that don’t face such large risks to their profit and balance sheet in 2020.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.