Lower dividends and no capital management look very likely in 2020 and beyond for banks, listed insurers and other financial groups for the rest of 2020.
APRA, the financial regulator, has told banks, insurers, and other financial groups to think carefully about deciding whether dividends can be paid to shareholders over the rest of this year and into 2021.
Companies will have to be sure that paying a dividend won’t damage the company’s financial strength and when a decision is made to greenlighted a payout, it will have to be lower and dividend reinvestment plans will have to be used to lower the cash outflow wherever possible
The statement means APRA has joined the Reserve Bank of New Zealand, the Bank of England and European Central Bank in telling banks and financial groups to limit or suspend dividends and capita management plans such as buybacks.
The RBNZ, Bank of England and ECB have gone as so far to tell banks not to payout dividends, while APRA’s advice is less firm, but it is obvious that it is directed at the major banks, three of which – NAB, ANZ, and Westpac – balanced their half years on March 31 and would now be starting to look at interim dividends.
Those banks will now either not pay dividends, or reduce current payout levels and try and encourage shareholders to take up the DRPs.
Macquarie Group balanced its 2019-20 financial year on March 31 as well and would fall into the same target group, while the Commonwealth doesn’t escape even though its 2019-20 financial year doesn’t balance until June 30 with the final dividend set in August.
Bendigo and Adelaide is a regional bank in a similar position, while Bank of Queensland, Suncorp (with Metway Bank), and insurers such as QBE, IAG and Suncorp’s brands are all in a similar target group to the bigger financial groups.
In a letter to ADIs, general insurers, life companies, and private health insurers, APRA outlined its expectations that these institutions limit discretionary capital distributions in the months ahead, including deferrals or prudent reductions in dividends.
APRA said in its letter that because banks and other financial groups play an important part in the economy, it “expects ADIs and insurers to 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.”
“This includes prudent reductions in dividends, taking into account the uncertain outlook for the operating environment and the need to preserve capacity to prioritise these critical activities.”
“Decisions on capital management need to be forward-looking, and in the current environment of significant uncertainty in the outlook, this can be very challenging. APRA is therefore providing Boards with the following additional guidance.
“During at least the next couple of months, APRA expects that all ADIs and insurers will:
- take a forward-looking view on the need to conserve capital and use capacity to support the economy;
- use stress testing to inform these views, and give due consideration to plausible downside scenarios (periodically refreshed and updated as conditions evolve); and
- initiate prudent capital management actions in response, on a pre-emptive basis, to ensure they maintain the confidence and capacity to continue to lend and support their customers.
During this period, APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer.
However, where a Board is confident that they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level.
Dividend payments should be offset to the extent possible through the use of dividend reinvestment plans and other capital management initiatives.
APRA also expects that Boards will appropriately limit executive cash bonuses, mindful of the current challenging environment.