APRA Urges Prudent Approach in Updated Guidance

The banking regulator has asked banks and insurers to maintain caution in planning capital distributions, by cutting dividend payments in half, as Covid-19 continues to cloud the economic outlook.

The Australian Prudential Regulation Authority (APRA) updated its capital management guidance easing restrictions around paying dividends.

This follows a strict recommendation in April telling banks and insurers “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”.

APRA has indicated that for the remainder of the calendar year boards should keep some money in the stockpile just in case things get worse.

To do this boards should retain at least half of their earnings when making decisions on capital distributions, conduct regular stress testing to inform decision making and make use of capital buffers to absorb disruptions.

APRA chair Wayne Byres said the updated guidance balanced the need for banks and insurers to keep supporting households and businesses, while also maintaining a prudent approach in the face of a very sharp and severe economic contraction.

“Although the environment remains one of heightened risk, we now have a stronger sense of how Australia’s economy and financial institutions are being impacted by Covid-19,” Byres said.

“On that basis, APRA believes that banks and insurers do not need to continue to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy.”

The APRA chair said the years spent building up capital strength in Australia’s banking sector to historical highs have been precisely to deal with a time like this.

“In the current environment, banks face additional challenges to their capital resilience, including the material volume of loan repayment deferrals, greater financial impact from Covid-19, and restrictions on dividends from their New Zealand operations,” Byres said.

“APRA has therefore set an expectation that dividend payout ratios for ADIs will be maintained below 50 per cent for this year.”