Banking regulator tightens dividend paying capability, Fitch downgrades Banks

Banking regulator tightens dividend paying capability, Fitch downgrades Banks

Since capital standards were tightened in the aftermath of Financial System Enquiry 2014, the Australian banks are among the safest in the world. For instance – on internationally comparable standards, Commonwealth Bank had CET1 of 17.5%, which included discontinued ops, at the end of last year.

Although tightening standards diminished the shareholders returns as returns on equity fell, the trade-off is way better because having weaker banks amid a pandemic-driven economic crisis could have been a threat to the sustainability of banks.

It is the reason why domestic policymakers and regulators have been sitting calmly and not completely banning banking dividends, unlike several other countries whose banks may have been running in troubled waters.

Given the socialism inherited by the major banks’ dividends, especially the dividends awaited by elderly Australians, the urge for complete eviction of bank dividends appears unreasonable, but the dividends could be lower.

And there are numerous reasons for lower dividends, including a potential recession, credit losses largely due to the steps adopted by the banks to come out as a saviour amid COVID-19 crisis, potential job losses in the economy, and deteriorating economic activity.

As challenges are anticipated to ascend over the course of future that will impact incoming cashflows of the banks, especially interest and principal payments by the customers, there is a paramount need for the banks to have excess buffer cash/capital to sustain extremely adverse conditions.

Thus, it appears reasonable that the Australia Prudential Regulation Authority (APRA) has notified ADIs and insurers to consider capital distribution optimisations in a bid to have sufficient headroom amid COVID-19 crisis.

APRA Chair, Wayne Byres noted that banks and insurers have to play a crucial role during the COVID-19 crisis in supporting households as well as businesses. The regulator had already shown generosity when it lowered its demand on the regulatory deliverables.

Regulator expects insurers and ADIs to continue to underwrite and lend amid this crisis that may need insurers and ADIs to maintain capital buffers, which could be achieved through limiting capital distributions or lowering dividends.  

Over the next few months, APRA has asked ADIs and insurers to:

  • have a forward view on capital utilisation,
  • apply substantial downside stress testing,
  • adopt proactive capital management for seamless service delivery.

Although APRA expects ADIs and insurers to defer dividend payments, in cases where an entity is undertaking stress testing prior to announcing dividends, the dividends should be materially lower.

Banks should utilise DRP or dividend reinvestment plans to offset the impact of dividend payments and other capital management initiatives. The regulator also expects to see limits on cash bonuses to the executives.

               

Yesterday, Fitch Ratings also lowered the credit ratings for the big four banks across a range of instruments. The rating actions reflected the growing adversities as a result of the pandemic and the restrictions implemented by the Government to curb the spread of the virus.

Westpac Banking Corporation (ASX:WBC) also responded to the APRA’s decision of the deferring/lowering the dividend payment. It notes that no decision has been made as of now with respect to the first-half dividend of the Bank, and the Board expects to report half-year results on 4 May 2020.

National Australia Bank Limited (ASX:NAB) also acknowledged the regulator’s demand with respect to capital management and dividends and said that the bank would consider the dividend during the half-year results finalisation process. NAB expects to report results on 7 May 2020.

Rating Actions for Major Banks

National Australia Bank Limited (ASX:NAB)

Fitch has downgraded NAB’s four credit ratings, which included Long-Term Issuer Default Rating (IDR) to ‘A+’ from ‘AA-’, short term IDR has lowered to F1 from F1+, and the outlook on long term IDR is negative.

Viability rating is changed to a+ from aa-, senior unsecured debt has been changed to A+ from AA-, and Tier 2 subordinated debt is changed to A- from A+.

For Bank of New Zealand, the long term IDR is changed to A+ from AA- with the outlook remaining as negative. Short term IDR has lowered to F1 from F1+. Also, the unsecured debt of BNZ International Funding Limited is changed to A+ from AA-.

Australia & New Zealand Banking Group Limited (ASX:ANZ)

Fitch Ratings confirmed that the outlook for ANZ’s long term IDR remains negative, and long term IDR is lowered to A+ from AA-, while the short term IDR has been downgraded to F1 from F1+. ANZ’s senior debt is now rated as A+, subordinated debt is rated as A-, and hybrid debt is rated as BBB.

Westpac Banking Corporation (ASX:WBC)

Fitch Ratings noted that the outlook for WBC’s long term IDR remains negative, and long term IDR is lowered to A+ from AA-, while the short term IDR has been downgraded to F1 from F1+. Likewise, the rating agency had lowered the outlook and ratings for the Westpac NZ, similar to the parent bank.

Also, the tier 1 capital instruments have been reaffirmed with no change as BBB, while the tier 2 capital instruments were lowered by two notches to A- from A+.

Commonwealth Bank of Australia (ASX:CBA)

Fitch Ratings confirmed that the outlook for ANZ’s long term IDR remains negative, and long term IDR is lowered to A+ from AA-, while the short term IDR has been downgraded to F1 from F1+. Tier 2 rating of the bank was revised to A- from A+. Issuer Default Rating for ASB Limited was revised to A+ and F1 with a negative outlook.  

Bank of Queensland Limited (ASX:BOQ)

BOQ declared interim results today (8 April 2020), and deferred the interim dividend payment until the outlook is clear. Its cash earnings for the half-year were down 10% compared to 1H19 at $151 million.

On 8 April 2020, CBA last traded at $59.81, down by 3.33% from the previous close.

On 8 April 2020, NAB last traded at $15.35, down by 4.836% from the previous close.

On 8 April 2020, WBC last traded at $15.25, down by 5.28% from the previous close.

On 8 April 2020, ANZ last traded at $15.520, down by 4.902% from the previous close.

On 8 April 2020, BOQ last traded at $5.03, down by 2.14% from the previous close.


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