ASX banks like CBA (ASX: CBA) have been told to cut their dividends by the regulator, APRA.
What’s going on with bank dividends?
ASX banks like CBA, Westpac (ASX: WBC), NAB (ASX: NAB) and ANZ (ASX: ANZ) have been told by the Australian Prudential Regulation Authority (APRA) to reduce their dividend payout ratios to below 50% for the rest of 2020.
According to reporting by the AFR, APRA Chairman Wayne Byres has sent a letter to banks to inform them of the dividend payout expectation because of the high demand of capital that COVID-19 impacts are having on the banks and economy.
One of the main things that is helping banks at the moment is the payment holidays for borrowers. Mr Byres said that there is still heightened risk in the economy, though APRA and the banks now have a better sense of how Australia’s economy is coping.
The AFR quoted Mr Byres: “In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals (which are subject at present to regulatory concessions), greater financial impact from COVID-19, and restrictions on dividends from their New Zealand operations.
ASX banks are also being impacted by the fact that New Zealand bank dividends are currently restricted, so profit generated there can’t be passed up to the parent banks in Australia.
The AFR is reporting that APRA wants the banks to utilise their capital buffers to help householders and borrowers through this period.
What does this mean for ASX banks?
I haven’t ever wanted to own ASX banks for dividend income. Mortgage payments may be monthly, making pleasing cashflow for banks, but in times of real economic stress I think banks can’t be completely relied upon for dividends.
Banks are systematically important for the economy. They can’t be allowed to fail. And it could cause a GFC-like credit freeze if the banks ran out of capital and had to stop lending. Like it or not, our economy seems to be quite reliant on the flow of credit to function properly.
But this also means the government and regulators have a lot of influence on banking operations. That’s one of the potential negative factors when investing in important businesses with a strong presence in Australian life.
Hopefully the banks can use the retained capital to generate stronger long term earnings. For dividends I’d prefer to buy one of these dividend shares instead.