Bank Dividend Reprieve Comes With Warning in South Africa

South Africa’s banking regulator eased guidance to lenders that they shouldn’t pay dividends and executive bonuses -- though warned that protecting cash reserves must still take priority amid ongoing uncertainty from the Covid-19 pandemic.

Where boards approve such payouts, they should be “prudent and commensurate with the assessment of current conditions and potential future uncertainty,” Prudential Authority Chief Executive Officer Kuben Naidoo said in a note to the industry. Banks should also refrain from using proceeds from regulatory-relief measures for either of those purposes, he said.

“Banks play a critical role in continuing to provide the necessary required funding to the wider economy amid the Covid-19 pandemic,” said Naidoo, who’s also a deputy governor of the South African central bank. “In light of the above, it is essential that banks conserve their capital resources, among other things, to continue to retain their capacity to support.”

The instruction is a relaxation of a guidance issued by the Prudential Authority 10 months ago that lenders should withhold dividends and bonuses. Naidoo said in November the ruling would only be lifted after South Africa emerged from uncertainty caused by the pandemic.

Vaccine Rollout

The game changer may be the international rollout of vaccines, which has prompted the South African Reserve Bank to revise global growth forecasts for 2021.

“The SARB ideally would have liked to keep their previous guidance in place for the remainder of this year,” said Nolwandle Mthombeni, senior banks analyst at Intellidex. “However, banks are sufficiently capitalized and have shown resilience and therefore are in a better position to pay dividends, and that’s the sense from the market as well.”

Similar debates are playing out elsewhere. The Bank of England offered U.K. banks a reprieve when it eased its own de facto ban on dividends in December. The European Central Bank has also lifted dividend curbs but urged banks to limit such shareholder payouts to less than 15% of profit, or 0.2% of their key capital ratio, for 2019 and 2020.

While Investec Ltd. unexpectedly announced a first-half dividend in November, larger South African rivals such as FirstRand Ltd. and Standard Bank Group Ltd. held off in 2020. They are expected to resume payments to shareholders after last year raising significant rainy-day provisions to help manage souring loans.

The six-member FTSE/JSE Africa Banks Index was down 0.1% in Johannesburg by 5 p.m. on Monday, reversing earlier gains of as much as 1.7%.

Dividend Outlook

”We are expecting Standard Bank and FirstRand to pay dividends in March with Nedbank and Absa more likely to do so in September,” said Jan Meintjes, a portfolio manager at Denker Capital.

The central bank extended regulatory relief to banks while urging them to preserve capital in April, a move designed to help lenders and their customers avoid loan defaults. Borrowers were granted payment breaks, and lenders introduced a credit-guarantee program backed by government to aid small and medium sized businesses.

“The Prudential Authority considers it critical that banks continue to fulfill the fundamental role of providing the required funding, among other things, to households and businesses amid the Covid-19 pandemic,” Naidoo said.

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