Australia’s major banks have come under pressure to suspend dividend payments during the coronavirus crisis after several central banks moved to stop them.
The Reserve Bank of New Zealand told local banks on Thursday to stop paying dividends to shareholders and parent banks in Australia.
It said the measure was intended to “further support the stability of the financial system during this period of economic uncertainty” and would remain in place until the economic outlook has “sufficiently recovered”.
The move makes it harder for some Australian banks to pay out dividends as roughly 10 per cent of the payouts are funded by payments from their New Zealand subsidiaries.
The announcement came after the UK’s biggest banks agreed to scrap billions of dollars of dividend payments following pressure from the Bank of England (BoE).
The UK’s Prudential Regulation Authority – an arm of the BoE – described the move as “a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption”.
Australian banks are now under pressure to follow suit.
This is mainly because the job losses and broader economic damage caused by the spread of the coronavirus will likely lead to a rise in non-performing loans – meaning banks will need more cash to withstand larger losses.
The Reserve Bank of Australia and the federal government have both announced measures to support and encourage banks to keep lending during the crisis.
The former has provided $90 billion worth of cheap credit for banks to on-lend to struggling SMEs, and the latter has allocated $20 billion towards guaranteeing loans to businesses that meet certain criteria.
Among other things, the banks have since offered six-month repayment holidays to struggling home owners and businesses to boost cash flow during the virus lockdown.
Asked whether the Australian Prudential Regulation Authority had plans to temporarily ban banks from paying dividends, a spokesperson told The New Daily that such decisions remained a matter for each bank’s board for the time being.
“APRA is actively engaging with banks to understand their intended approach to dividends, as well as other distributions to shareholders or employees, given current uncertainties,” they said.
“For the time being, decisions on dividends and variable remuneration remain matters for boards to determine in line with their obligations under APRA’s prudential framework.”
The spokesperson added, however, that APRA had “advised banks that it expects them to prudently manage their capital, and ensure their actions in the foreseeable future are consistent with their ability to provide ongoing credit support to the broader economy”.
Hours later, Prime Minister Scott Morrison told reporters that the nation’s financial regulators had no plans to scrap dividends.
“The Council of Financial Regulators is considering this matter,” Mr Morrison said.
“But we have not received that advice to move to that level.”
Good for liquidity, bad for pensioners
Former ANZ chief economist Saul Eslake said it was difficult to say whether Australia’s banks should scrap dividends during the crisis.
Not paying dividends would shore up capital and boost banks’ capacity to lend, he said.
And members of the community might regard it as a “sacrifice being made by the owners of capital – shareholders and banks – at a time when lots of other people are making sacrifices”.
“But the counter argument, of course, is that an awful lot of people who the Prime Minister likes to call mums and dads – self-funded retirees and so forth – do rely on bank dividends as an important source of their income,” Mr Eslake said.
He said superannuation funds owned plenty of bank shares, too.
“My guess is that, if APRA directed banks not to pay dividends, there would probably be calls on government to provide additional income support for people of modest means who relied heavily on bank dividends for income,” Mr Eslake said.
This could come in the form of one-off payments to households or a further reduction in the pensioner deeming rate.
Following the RNBZ’s announcement – and the subsequent fear that APRA may soon follow suit – all the major banks saw their share prices fall by at least 3.8 per cent on Thursday.
Ratings agency Moody’s also downgraded their outlook for Australian banks from “stable” to “negative” due to the impact of the coronavirus.