APRA removes dividend restrictions for the banks

APRA has told Commonwealth Bank of Australia (ASX:CBA) and the rest of the big four banks that they will no longer have restrictions on their dividend payments…

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It has been a subdued day of trade for the big four banks on Tuesday despite some very positive industry news.

At the time of writing, Australia and New Zealand Banking GrpLtd (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) shares are trading flat, whereas National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) shares are trading slightly lower.

What was announced?

This morning the Australian Prudential Regulation Authority (APRA) has provided updated capital management guidance to authorised deposit-taking institutions (ADIs) and insurers.

This replaces its recommendation in July this year for banks to retain at least half of their earnings.

According to the release, from the start of 2021, APRA will no longer hold banks to a minimum level of earnings retention. This means the banks will be able to pay out as much as their earnings to shareholders as they see fit.

Though, it is worth noting that the regulator wants the banks to be vigilant when it comes to dividends.

APRA commented: “Since July, there has been an improvement in the economic outlook, bank capital and provisioning levels have strengthened, and the majority of loans that were previously granted repayment deferral have recommenced repayments. However, a high degree of uncertainty remains in the outlook for the operating environment.”

“In determining the appropriate level of dividends, APRA expects ADIs and insurers to remain vigilant, regularly assess their financial resilience through stress testing, and undertake a rigorous approach to recovery planning. The onus remains on boards to moderate dividend payout ratios to ensure they are sustainable, taking into account the outlook for profitability, capital and the broader environment,” it added.

Extensive stress testing.

APRA made the decision after looking at the results of extensive stress testing since the onset of COVID-19. These tests indicate that Australia’s banking system is strong and could withstand a very severe economic downturn and still continue to support the economy by supplying credit to households and businesses.

The test included a Severe Downside scenario, which involved a 15% fall in gross domestic product (GDP), a rise in unemployment to over 13%, and a fall in national house prices of over 30%.

The result of the Severe Downside scenario was a 5 percentage-point fall in the CET1 capital ratio of the banking system from 11.6% to 6.6%.

However, the regulator notes that this remains well above the 4.5% minimum capital requirement. Furthermore, it does not factor in mitigating actions that would inevitably be undertaken to offset this impact.

APRA’s Chair, Wayne Byres, commented: “A decade-long process of increasing capital levels and bolstering resilience in the banking system has put Australian banks in their current position of strength, allowing the sector to support customers and the broader economy at a time of crisis.”

“The results of APRA’s extensive ADI stress testing provide reassurance that the banking system remains well positioned to absorb the impact of a severe economic shock and retain the capacity to continue supplying credit into the economy,” he added.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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