Australia Bank Dividend Cap Lifted as Recovery Takes Hold

(Bloomberg) -- Australia’s prudential regulator has abolished its cap on bank dividend payments as the economic recovery takes hold, though urged lenders to ensure payouts are sustainable.

From the start of 2021, banks will no longer be held to a minimum level of earnings retention, the Australian Prudential Regulation Authority said in a statement Tuesday. In April, it had recommended lenders defer decisions on dividends until the outlook was clearer, effectively banning payouts. That guidance was eased in July, when it imposed a dividend cap of 50% of earnings for the remainder of 2021.

The move will be a welcome relief for Australia’s legion of mom and pop shareholders, particularly retirees, who hold the big-four banks and Macquarie Group Ltd. for their steady stream of dividends, and have been hit hard by reduced payouts by this year. Income from deposits has also been crimped as the central bank cut interest rates to a record low.

Bank shares were mixed in early Sydney trading. Australia & New Zealand Banking Group Ltd. was up 0.2%, Commonwealth Bank of Australia fell 0.1% and National Australia Bank Ltd. dropped 0.2%. Westpac Banking Corp. was little changed. The banks have rallied in recent months as the economic recovery gathered steam, fears of a house-price crash proved unfounded and the number of deferred home loans declined.

Still, the regulator recommended banks remain prudent in determining the appropriate level of dividends.

Banks and insurers should “remain vigilant, regularly assess their financial resilience through stress testing, and undertake a rigorous approach to recovery planning,” APRA said. “The onus remains on boards to moderate dividend payout ratios to ensure they are sustainable, taking into account the outlook for profitability, capital and the broader environment.”

The regulator also said banks could withstand a very severe economic shock, involving a 15% drop in GDP, unemployment rising to more than 13% and house prices plunging 30%.

“The results of APRA’s extensive stress testing provide reassurance that the banking system remains well positioned to absorb the impact of a severe economic shock and retain the capacity to continue supplying credit into the economy,” APRA Chair Wayne Byres said in the statement.

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