Australian Banks: There Go The Dividends

Feature Stories | Apr 08 2020

Just when bank analysts were attempting to forecast the possible extent of dividend cuts for Australia's banks, along comes APRA to help make the banks' decisions for them.

-APRA directive changes the landscape for banks
-Dividends to be materially cut, deferred or suspended
-All hangs on the unknown extent of the crisis

By Greg Peel

"More worryingly, after a shocker of an FY19, is that FY20 is shaping up to be even worse."

This is an extract from Australian Banks: More Dividend Cuts To Come, published on November 29, 2019 (

At the time, Australia's banks were still reeling from Royal Commission fallout, the US and China were locked in a trade war, the RBA was cutting rates in an attempt to avoid Australia falling into recession, and the bushfires underway since October were far from hitting their peak.

This was the banking sector outlook back then:

"It is widely assumed the RBA will cut again to 0.5%, if not next month at least February next year (which will be the next meeting). The governor has oft declared that there's no point in cutting below 0.5%, rather "unconventional measures" will be required, which implies QE of some nature.

If we're into unconventional measures, we will be staring down a recession. The government is finally starting to wake up to the problem, but most suggest it's a case of too little, too late on the fiscal stimulus front.

The outlook for loan demand and thus bank revenue growth in FY20 remains subdued. To that end, and given all of the issues heretofore outlined, analysts suggest FY20 will be all about the banks desperately trying to hang on to what dividends they are now paying. Analysts are largely agreed more dividend cuts are on the horizon."

We'll never know if Australia was destined to fall into recession, or whether, due to a complete lack of action on the part of the Morrison government, the RBA would have been forced to cut to 0.5% (or lower) and adopt unconventional measures. But what we do know is that 2019 was not a good starting point for the Australian economy when we entered 2020.

We'll never know if the banks would have been forced into cutting their dividends meet capital requirements, because now everything has changed.

The Long Arm of the Regulator

This article had been intended to outline bank analyst assumptions with regard Australian bank dividends going forward in this crisis. But the news flow is moving very fast at this time. A quick summary: all of them decided dividend cuts were likely, if not unavoidable.

The Reserve Bank of New Zealand put the cat among the pigeons last week when it suspended bank dividend payments. Citi's analysts, for one, were surprised, given the bulk of NZ banking services is provided by Australia's Big Four. Yet Citi concluded it was an easy decision for the RBNZ to make, enabling the central bank to build up a capital reserve in the event of the virus leading to an existential banking crisis.

Soon after, dividend suspensions were also announced for UK and European banks. In the US, the majors got together and agreed to all suspend share buybacks, but not dividends. US banks are much better capitalised than UK and European banks, and Morgan Stanley's CEO pointed out the moral dilemma of taking bank dividend income away from retirees already reeling from zero interest rates.

US banks may yet be forced to suspend dividends, but only if the crisis deteriorates markedly. (US bank dividend yield pales in comparison to Australian yields.)

Scott Morrison's immediate response was to state he had no intention of suspending Australian bank dividends. But then it's not his call to make. CEOs of the Big Four responded by suggesting they would not be suspending dividends at this stage, with Westpac's CEO also pointing out the same retiree income dilemma.

No suspension does not mean dividends may nevertheless need to be cut.

It's all academic now, as yesterday APRA advised Australian banks to "seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer".

The regulator expects that all discretionary capital distributions, particularly ordinary dividends, to be deferred or "materially reduced".

It's advice, not instruction, but it does make any decision a lot easier for the banks, given it is assumed they were preparing to at least cut their dividends anyway. If retirees now miss out on much-coveted bank dividend income, blame APRA.

The banks can still pay dividends if they want, they might choose to pay a much smaller dividend, they might defer their dividend payment to a later date, or they might suspend the next dividend altogether. Note that ANZ Bank ((ANZ)), National Bank ((NAB)), Westpac ((WBC)) and Bank of Queensland ((BOQ)) declare dividends in April-May, while Commonwealth Bank ((CBA)) and Bendigo & Adelaide Bank ((BEN)) declare in August.

Bank of Queensland was a sure bet to cut dividends at its result release, which coincidentally was this morning. The board has instead suspended dividends in line with APRA's advice. We might call that a "get out of jail free" card. Bank analysts are now assuming the majors will follow suit.

More on that in a minute. For now, the story so far, prior to APRA's bombshell.

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