Story updated by Gareth Vaughan
The Reserve Bank (RBNZ) is restricting all locally-incorporated banks from paying dividends on ordinary shares and preventing them from redeeming bond issues until “the economic outlook has sufficiently recovered”.
The restrictions take effect today, April 2, and will be in place “until further notice”.
“This initiative further supports the stability of the financial system by maintaining higher levels of capital during the period of falling economic activity resulting from the COVID-19 pandemic,” RBNZ Deputy Governor and General Manager for Financial Stability Geoff Bascand said.
An RBNZ spokesperson told interest.co.nz this is believed to be the first time the prudential regulator has put dividend restrictions on banks, while bond redemptions haven't been halted in a blanket manner before.
New Zealand's four Australian-owned banks - ANZ NZ, ASB, BNZ and Westpac NZ - paid $2.39 billion in dividends last year, down 30% from $3.39 billion in 2018.
The drop came as ANZ's dividend fell $1.23 billion, or 77%, to $375 million, as it retained earnings to prepare for the RBNZ's new bank capital requirements.
More support to encourage banks to lend to businesses
The RBNZ made the dividend/capital announcement as it offered banks further support to help them continue lending to businesses.
It’s offering them loans with three-year terms, to help them offer businesses loans through the Government’s Business Finance Guarantee Scheme.
The Government has committed to underwriting 80% of certain business loans to encourage banks to lend to businesses at a time they might otherwise have deemed this too risky. This means in the event of a default; taxpayers will bear 80% of the loss.
So in addition to this backstop, the RBNZ is saying it will lend to banks to help them lend to businesses.
For banks to take out these “Term Lending Facilities”, they will have to pay the RBNZ an interest rate higher than the Official Cash Rate (OCR). The facility will be available in May.
The RBNZ is willing to lend banks up to $6.25 billion under the scheme - the same value of the loans the Government has committed to underwriting.
ANZ capital notes can't be redeemed
To expand on the dividend/capital part of the announcement, banks won’t be able to redeem non-Common Equity Tier 1 capital instruments, typically long-dated subordinated debt such as bonds and capital notes.
ANZ NZ Treasurer Paul Daley said this means ANZ NZ can't redeem $500 million of mandatory convertible perpetual subordinated securities, capital notes, when scheduled on May 25. The RBNZ’s decision doesn't affect ANZ NZ’s ability to pay interest on the capital notes.
"The terms of the capital notes also provide for their conversion into ordinary shares of Australia and New Zealand Banking Group Limited (listed on the NZX and ASX) in May 2020 or May 2022 (conversion is subject to certain conditions as set out in the investment statement of the Capital Notes)," Daley said.
"ANZ NZ’s capital position remains strong, with total capital of $13.4 billion, or 13.6% of risk weighted assets at 31 December 2019. ANZ NZ’s total capital increased by approximately $1.6 billion between 1 October 2018 and 31 December 2019.
"ANZ NZ acknowledges the steps the RBNZ is taking to promote market liquidity and stability, the flow of funding to the economy and this measure to maintain the banking system’s capital position during the COVID-19 pandemic."
Kiwibank said it won't be able to exercise its early redemption option on May 27 for a $150 million perpetual bond issue which counts as Additional Tier 1 capital. And because this bond was the related bond for $150 million worth of perpetual capital notes, these cannot be redeemed on their first early repayment date of May 27 either. Nonetheless interest payments on both securities will continue.
"Kiwibank agrees that New Zealand banks need to remain well capitalised so that they can continue lending to customers and to provide protection in the uncertain times created by COVID-19," Kiwibank's head of funding Geoff Martin said.
BNZ highlighted a $550 million subordinated unsecured note issue.
"Under the terms of the BNZ Subordinated Notes, BNZ has the option, subject to certain conditions, including obtaining the approval of the RBNZ, to redeem all or some of the BNZ Subordinated Notes on any interest payment date on or after 17 December 2020. Holders of BNZ Subordinated Notes should not expect that RBNZ approval will be given should BNZ choose to exercise this option to redeem. The agreement with the RBNZ does not affect BNZ’s ability to pay interest on the BNZ Subordinated Notes," BNZ Treasurer Neil Bradley said.
ASB said its NZX-listed subordinated notes are not subject to the RBNZ’s restriction on the distribution of dividends.
"ASB is well capitalised and as at December 2019 had a Common Equity Tier 1 (CET1) capital ratio of 11.7% and Tier 1 capital ratio of 13.5%."
And the Westpac Banking Group, parent of Westpac NZ, said it's well capitalised and at 31 December 2019 "had a Level 2 Common Equity Tier 1 (CET1) capital ratio of 10.8% and a Level 1 CET1 capital ratio of 11.1%. Non-payment of dividends from WBC’s New Zealand banking subsidiary, Westpac New Zealand Limited, only affects WBC’s Level 1 CET1 capital ratio."
Heartland dividends to continue?
Meanwhile Heartland Group Holdings, listed parent of Heartland Bank, hinted that it may continue paying dividends.
"Importantly, the distribution [dividend] restriction applies to Heartland Bank, and not to Heartland. Heartland’s Board will consider the impact (if any) of the restriction on its own, separate, dividend policy, and when considering the dividends that it may wish to declare (if any) to its shareholders in due course," Heartland Group Holdings said.
Other steps the RBNZ has taken to support liquidity
In addition to offering banks loans to support the Government's Business Finance Guarantee Scheme, the RBNZ on March 20 started offering banks loans with three, six or 12-month terms. It is taking government bonds, residential mortgage-backed securities, and other bonds as collateral for these loans.
Banks from Tuesday were also able to swap their holdings of “Corporate Paper” (big business debt issuances typically with shorter maturities) and other “Asset Backed Securities” for the RBNZ’s cash.
The RBNZ has committed to buying up to $30 billion of New Zealand Government Bonds on the secondary market to make sure interest rates remain low and the market functions well.
It has also deferred the start of the seven year implementation of new bank capital requirements by a year until July 2021, which it says frees up $47 billion, which banks could lend.
And the RBNZ has reduced banks' Core Funding Ratio from 75% to 50%.
For a more detailed run-down of all the steps the RBNZ has taken to support financial market liquidity, see this story.
Here’s a statement from the RBNZ on its dividend/capital and three-year loan announcement:
The Reserve Bank is introducing a Term Lending Facility (TLF), a new longer-term funding scheme for the banking system, in support of the Government’s Business Finance Guarantee Scheme to help promote lending to businesses.
The TLF is similar to the recently announced, Term Auction Facility (TAF), and both provide liquidity to the banking system. The TLF aims to complement the Government’s Business Finance Guarantee Scheme, announced last week, by ensuring access to funding for banks at low interest rates for up to 3 years duration, which is longer than the Bank’s other liquidity facilities.
“We are working in-step with the Government and the country’s banks to provide the economic support that is crucially needed during this uncertain time,” Reserve Bank Governor Adrian Orr says.
“New Zealand’s financial system remains sound, with strong capital and liquidity buffers. We are confident that the financial system is well placed to respond to the impacts of coronavirus.”
“The facility is designed to support bank lending under the Business Finance Guarantee Scheme,” Assistant Governor and General Manager of Economics, Financial Markets and Banking Christian Hawkesby says.
“We are currently engaging with banks on the operational details of the scheme, with the intention of launching our first TLF operation in May.”
As previously announced, the Reserve Bank’s Monetary Policy Committee has worked to mitigate the severe economic effects of COVID-19 by reducing the Official Cash Rate and implementing a Large Scale Asset Purchase programme. In addition, the Reserve Bank has deferred the start of increased capital requirements and is delaying planned regulatory initiatives, to allow banks to focus on lending to their clients during the disruption of COVID-19.
“To further support the stability of the financial system during this period of economic uncertainty, we have agreed with the banks that during this period there will be no payment of dividends on ordinary shares, and that they should not redeem non-CET1 capital instruments,” Deputy Governor and General Manager for Financial Stability Geoff Bascand says.
The restrictions take effect from today under revised Conditions of Registration issued to all locally-incorporated banks. They will remain in place until further notice, with the aim of relaxing them when the economic outlook has sufficiently recovered.
“This initiative further supports the stability of the financial system by maintaining higher levels of capital during the period of falling economic activity resulting from the COVID-19 pandemic,” Mr Bascand says.
- Responding to COVID-19
- Mortgage holiday and business finance support schemes to cushion COVID impacts
- Corporate facility another step to support market functioning
- Financial system sound, and Reserve Bank providing additional support
- The Term Lending Facility (TLF) will offer loans for a term of three years to ensure a stable source of funding that aligns with the Government’s Business Finance Guarantee Scheme lending profile.
- The TLF will be priced at a margin over the OCR, with similar collateral eligibility and haircuts to our existing OMO and TAF operations.
- The Reserve Bank’s Term Lending Facility programme will link access to funds to banks’ lending under the Business Finance Guarantee Scheme.