Dividend cuts from banks; Should you worry?

  • Apr 05, 2020 AEST
  • Team Kalkine
Dividend cuts from banks; Should you worry?

Banks around the world have always been known for paying regular dividends to their shareholders. However, due to the recent outbreak of coronavirus which has impacted the operations of businesses all around the world, many companies and banks have decided to halt their dividends. In Australia, the authorities have not yet ordered the banks to restrict the dividend payments, but the central banks across different other major countries have advised the bank to freeze their dividends until the current coronavirus crisis is over.

The operations of many companies have been hit hard by the coronavirus crisis, as a result of which, they have decided to halt the dividend payments to preserve more cash. The pressure to cut the dividends is coming from Governments as well. Recently in the US, a US$2 trillion stimulus bill was announced to support the businesses in the current pandemic. However, in order to take advantage of this lending program, the companies are not permitted to pay dividends to their shareholders until a certain period.

What’s surprising for investors is that many Central Banks have asked banks to not pay a dividend until the crisis is over.  Banks usually maintain the necessary capital to get them through a crisis or any sudden shock. So why Central Banks have asked banks to withdraw dividend.

By reserving more cash from not paying dividends, banks can lend more to the businesses and help the economy to survive. As Coronavirus is proving to be a significant shock to the economies all around the globe, experts believe that Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.

In New Zealand, the Central bank recently advised freezing the distribution of dividends on ordinary shares by all banks in New Zealand during the period of economic uncertainty caused by the Coronavirus pandemic. In order to support the stability of the financial sustem, the Central bank has also informed the New Zealand banks that they should not redeem non-CET1 capital instruments during this period

As a result of this, the New Zealand’s subsidiary of the Commonwealth Bank of Australia (ASX: CBA)- ASB Bank Limited (ASB), has decided to suspend the dividend and CBA has assured that it is well capitalized and dividends from its New Zealand subsidiary, ASB Bank Limited (ASB), only affect CBA’s Level 1 CET1.

Similarly, National Australia Bank Limited’s (ASX: NAB) wholly-owned subsidiary Bank of New Zealand (BNZ), have restricted the payment of ordinary dividends. NAB does not anticipate that this restriction will have a material impact on NAB’s Level 1 capital position, or it will impact NAB’s Level 2 capital ratio.

Australia And New Zealand Banking Group Limited (ASX: ANZ) has announced that the RBNZ’s decision to not pay dividends on the ordinary shares, will prevent it from redeeming its NZ$500 million Capital Notes on 25 May 2020.

ANZ has recently announced unprecedented support package for small business and home loan customers which includes a reduction of some fixed-rates of 0.80% per annum on new loans for small business and reduction of variable small business rates of 0.25% per annum, 49% per annum for home loan customers, as well as variable home loan rates of 0.15% per annum.

The Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, the Federal Reserve, and the Swiss National Bank have recently announced a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements and have agreed to lower the pricing on the standing US dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the US dollar overnight index swap (OIS) rate plus 25 basis points. The European central bank has allowed its regulated banks to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, providing significant capital relief to banks in support of the economy.

In Australia, the central bank has not yet announced any plan to freeze the dividends of Banks but has injected liquidity through its open market operations, increasing Exchange Settlement (ES) balances from around $2.5 billion to $14 billion. The Governor of RBA has proposed a package of policy measures, which together would assist in supporting the Australian economy through the period ahead and would help build the necessary bridge to the economic recovery and support that recovery once the COVID-19 outbreak is contained.

The elements of the package include:

  • A further reduction in the cash rate target to 0.25 per cent;
  • A target for the yield on 3-year Australian Government bonds of around 0.25 per cent;
  • A term funding facility for the banking system, with particular support for credit to small and medium-sized businesses;
  • Exchange settlement (ES) balances at the Reserve Bank to be remunerated at 10 basis points, rather than zero as would have been the case under the previous arrangements.

 

Investors should understand these are challenging times and restrict themselves from hoping any high returns from their investments. In terms of receiving dividends from Banks, currently Australians are at better position as there is still no restriction on Banks to pay dividends. In the current climate, one must understand that almost every government is trying their best to contain the damage caused by the Coronavirus epidemic, and sooner or later this crisis will end. Many experts believe that in the long-run the things will get better and the economies will recover.


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