The Reserve Bank (RBNZ) is easing the dividend restrictions placed on retail banks at the height of COVID-19.
Banks can now pay up to 50% of their earnings as dividends to their shareholders.
In other words, dividends can't exceed 50% of net profit after tax reported in the bank’s most recently completed financial year.
The restrictions do not prevent a bank from paying an interim dividend (for example, at the half year). In such cases it is the total dividend paid in the year that is limited by the restriction.
The 50% dividend restriction will remain in place until July 1, 2022, when the RBNZ plans to remove limits entirely - "subject to no significant worsening in economic conditions".
The RBNZ’s restrictions on repaying holders of additional Tier 1 and Tier 2 capital, bond or debt instruments have also been lifted.
A restriction preventing banks from paying any dividends was put in place in April 2020, and extended in November 2020, to support financial stability and the provision of credit in the economy due to the impacts of COVID-19. It was the first time the RBNZ put dividend restrictions on banks, while bond redemptions hadn't been halted in a blanket manner before.
“The New Zealand economy has rebounded to a stronger position than anticipated at the outset of the COVID-19 pandemic and as such, the complete restriction on dividends is no longer needed”, RBNZ Deputy Governor and General Manager Financial Stability Geoff Bascand said.
“Economic activity in New Zealand has picked up over recent months. However, the road ahead remains uncertain. As we outlined in our February Monetary Policy Statement, economic recovery is patchy, and ongoing uncertainty is expected to constrain business investment and household spending growth. Given the uncertainties ahead, it is appropriate to retain some restrictions on the dividends that banks can pay.”
Bascand said the RBNZ had written to the banks to make it clear the regulator expected them to be prudent in determining the appropriate size of dividends paid to their shareholders.
He also said banks’ decisions should take into account the requirement to meet higher capital requirements resulting from the RBNZ’s capital review.
“We have delayed the implementation timetable of the Capital Review twice over the course of last year to allow banks the regulatory relief needed to support their customers. As economic conditions improve, building strong capital buffers needs to be prioritised,” Bascand said.
New higher capital requirements will start applying from July 1, 2022, when the dividend restrictions are removed.
The Australian Prudential Regulation Authority (APRA), which supervises the parents of NZ's big four banks, discouraged dividend payouts last April and then moved to a 50% payout ratio in July. In April last year APRA said banks should "seriously consider deferring decisions on dividends given the uncertainty in the economic outlook," and should "offset any distributions to the extent possible through other capital actions."