The Australian Prudential Regulation Authority (APRA) has decided that ASX banks don’t have to hold onto a certain amount of their earnings regarding dividends.
What are the details?
From the start of 2021, ASX banks will be able to pay higher dividends again.
APRA said that: “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.”
The regulator still wants banks, insurers and so on to be careful with their capital because Australia certainly isn’t completely through this period yet. Boards of banks will need to ensure that the dividends are sustainable whilst taking into account the outlook for profitability, capital and the economy as a whole.
APRA stress tested the banks and other financial institutions to ensure that they can withstand a very severe economic downturn whilst supporting the economy with loans to households and businesses. That test included a 15% fall in GDP, a rose in unemployment to over 13% and a fall in national house prices of over 30%. The test also assumed the banks didn’t raise any capital or reduce operating costs.
APRA Chair Wayne Byres said: “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.”
What this means for banks
All of the big ASX banks reduced their dividends during 2020. It affected Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) as well as the smaller banks.
I don’t expect the banks to suddenly pay a 2019-sized dividend in the next result. But this could pave the way for 2021 to be a much better year for the banks, combined with a recovery of earnings.
But I don’t think banks are the best ASX dividend shares around. This year has shown that dividend payments can be cut if there is a sizeable hit to earnings. I’d rather go for a pick like Brickworks Limited (ASX: BKW) or Magellan Financial Group Ltd (ASX: MFG) which I covered here.
