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Summary
- Banks are no longer required to hold a minimum level of earnings retention.
- With this, APRA has provided a way out for increased payouts following a period of muted distribution to shareholders due to coronavirus pandemic.
- APRA said that the economic outlook has improved since July and bank capital and provisioning levels have strengthened.
Australian Prudential Regulation Authority (APRA) on Tuesday said that banks are no longer required to hold a minimum level of earnings retention as against the earlier recommendation in July 2020 amid COVID-19 crisis. The updated capital management guidance of the prudential regulator of the Australian financial services industry will come into effect from the start of 2021.
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In a statement released on 29 July 2020, APRA had asked banks and insurers to defer decisions on the appropriate level of dividends until the outlook is clearer amid disruptions caused by the coronavirus pandemic. The regulator had asked them to retain at least half of their earnings while making decisions on capital distributions. Now, with this easing of the cap for the authorised deposit-taking institutions (ADIs) and insurers, APRA has provided a way out for increased payouts following a period of muted distribution to shareholders.
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Bank capital strengthened
APRA further said that the economic outlook has improved since July. It also noted that bank capital and provisioning levels have strengthened over the months. A large number of loans that were earlier granted repayment deferral status have restarted payments. But it also cautioned saying that a high degree of uncertainty continues to remain in the operating environment outlook.
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ADIs, insurers should remain vigilant
APRA also asked the ADIs and insurers to remain vigilant and regularly assess their financial resilience via stress testing. It also asked them to undertake a rigorous approach to recovery planning. APRA also updated that the onus now remains on the boards of these financial institutions to moderate dividend payout ratios keeping in mind their sustainability. They should take into account the outlook for profitability, capital and the broader environment, the regulator added.
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The update capital guidance by APRA has been based on the results derived from the stress testing conducted by it since the onset of coronavirus in case of ADIs. APRA said that these tests indicate that the country’s banking system can stand against a severe economic downturn and continue to supply credit to households and businesses.
