All eyes on Australia's big banks after Reserve Bank bans dividends

Thursday, 2 April 2020

The Reserve Bank has ratcheted up the pressure on New Zealand's big banks.

OPINION: Bank stocks tumbled again on Thursday as looming dividend cuts added a new source of uncertainty for shareholders.

All eyes are now on Australia's big banks, as they weigh mounting pressure to halt dividend payments to investors and shore up cash.

The commercial banks form the backbone of the financial system, and in Europe and Britain regulators have pressed banks there to halt payouts and build up cash against the loan losses they will face through the current pandemic and economic shock.

On Thursday, New Zealand's Reserve Bank racheted up pressure when it announced that all locally incorporated banks would be required to suspend dividends on ordinary shares through the current period of economic uncertainty.

The measure includes ANZ, BNZ, ASB and Westpac. All are local subsidiaries of Australian parent companies and form the preponderance of their foreign operations. Together the Australian four make up some 86 per cent of New Zealand's lending market.

The parent companies are also widely held by investors on this side of the Tasman.

Reserve Bank

The regulator's move requires those subsidiaries to retain profits internally, instead of paying them out as they typically do in an annual dividend to the parent. However, it does not directly prevent the parent banks from making dividend payments to investors.

At print time, none of the so-called big four banks – Commonwealth Bank, Westpac, National Australia Bank and ANZ – had updated markets on their dividend policies.

Pressure already mounting

ANZ, BNZ, ASB and Westpac are all are local subsidiaries of Australian parent banks.

Analysts, however, were already widely expecting the banks to cut, though not suspend, their payouts before the Reserve Bank acted on Thursday.

In a report last week, Matthew Wilson, senior research analyst covering banks at Evans & Partners in Melbourne, noted: 'we think all the banks should now cut their dividend pay-outs materially.'

Wilson cited the need to preserve and create capital 'as it becomes increasingly likely that this sudden economic stop will generate high bad debts and economic dislocation.'

Also affected are smaller New Zealand-owned banks.

Heartland Group, which owns Heartland Bank, and is listed on the New Zealand and Australia stock exchange, said the company's board will now consider whether the Reserve Bank's change will affect the larger company's payout to shareholders.

Eliza Wu, associate professor of finance at the University of Sydney business school, said a suspension of dividend payouts was 'the right course of action.'

She said the cash was needed to 'support rapidly deteriorating and stressed economies' through short term loans to help businesses.

She also said banks needed to help customers work out existing distressed loans, which could include reducing or not charging interest for some months.

Despite the rising pressure, the Australian banks are considered strong and well capitalised. S&P credit analyst Sharad Jain confirmed this week that the credit ratings of the big Australian banks are likely to remain unchanged through the crisis.

Quid pro quo

For weeks, central banks, including New Zealand's, have responded to the economic shock by loosening rules for the financial sector and providing emergency funding.

Fiscal policies have also been rapidly cobbled together to help both banks and, through banks, other businesses as well as household borrowers.

Among the new measures, The Reserve Bank is offering banks loans with 3-year terms to encourage continued lending to business customers. At the same time, the Government will guarantee 80 per cent of some new lending.

'The bankers are civil servants now in a way, being asked to execute the policies of the Government,' said Martien Lubberink, bank capital specialist at Victoria University in Wellington.

'Some of the extraordinary measures are to help the banks. Some are to help the banks' customers. Sometimes it's difficult to pick the two apart … but I think it's reasonable to attach some strings to the help they're getting.'

Lubberink said it was also reasonable to ask bank executives to reconsider bonuses during the crisis, as both the Bank of England and the European Central Bank have done.

The subject has not been raised publicly by regulators in Australia and New Zealand.

APRA and other regulators

The Australian Prudential Regulation Authority has made no announcement on bank dividends. But early this week British banks confirmed they would scrap dividends for 2020 at the behest of the Bank of England.

The European Central bank also asked lenders to stop dividends and share buy backs, as well as limit bonuses and through October of this year.

Canadian banks on the other hand are taking a different tack. Several have reaffirmed their dividends and, broadly speaking, analysts are not expecting cuts.

Their regulator, the Office of the Superintendant of Financial Institutions, has told banks not to increase dividends or buy back shares during this period.