The Reserve Bank (RBNZ) is removing the last of the dividend restrictions that were placed on banks at the start of the Covid pandemic in 2020.
The central bank said on Thursday that the last of the restrictions would be lifted from July 1.
Originally, on April 2, 2020 The RBNZ restricted all locally-incorporated banks from paying dividends on ordinary shares and preventing them from redeeming bond issues until “the economic outlook has sufficiently recovered”.
This was eased at the end of March 2021 to allow banks to pay up to 50% of their earnings as dividends to their shareholders, with the RBNZ stating an intention to remove them entirely on July 1, 2022, "subject to no significant worsening in economic conditions".
RBNZ Deputy Governor Christian Hawkesby confirmed on Thursday that the restrictions would be lifted from July 1.
“Underlying strength remains in the economy, supported by a strong labour market, sound household balance sheets, continued fiscal support, and a strong terms of trade. However, the economy is still facing headwinds, including heightened global economic uncertainty, cost pressures, and low consumer confidence. As such, banks should ensure that they are well placed to manage the impacts of weaker activity on their balance sheets and to assist customers,” he said.
“The restrictions have supported financial stability during the height of the Covid-19 pandemic. With the restrictions coming to an end, we are communicating with the country’s registered trading banks about our ongoing expectation that banks put the need to support households and businesses at the centre of their assessment of the appropriate level of dividends, and continue to be prudent in determining the appropriate size of dividends paid to their shareholders.”
Hawkesby said banks’ dividend decisions should also take into account the higher capital requirements, which begin to apply to systematically significant banks at the same date (July 1, 2022) as set out in the Reserve Bank’s Capital Review.
The new higher capital requirements mean that total capital requirements, including the Prudential Capital Buffer (PCB), will gradually increase from a capital ratio of 10.5% of risk weighted assets at the moment, to 18% in 2028 for the 'Domestic Systemically Important banks' (D-SIBs). For all other banks, the total capital requirement, including the PCB, will lift from 10.5% to 16%. The first 1% increase starts from July 1, 2022 and will apply only to D-SIBs.
The RBNZ says banks are well positioned to meet the new capital requirements resulting from the Capital Review. Based on their pre-Covid levels of profitability and lending growth, if banks were to pay out around 50% of earnings as dividends, this would allow them to meet the incremental increases in capital requirements from 2022 to 2028, although greater profit retention may be needed to meet minimums in the final year. If dividends are lower, at 30% of profits, banks would be able to meet capital requirements comfortably.
"These requirements will help support financial stability and the wellbeing of New Zealanders," Hawkesby said.
"With the dividend restrictions ending, our regular suite of prudential settings, including capital, liquidity and other measures remain in place to support financial stability."
In a letter to the banks regarding the lifting of dividend restrictions, Hawkesby said he wanted to reiterate the Reserve Bank’s "ongoing expectation" that banks put the need to support households and businesses at the centre of assessments of the appropriate level of dividends, and continue to be prudent in determining the appropriate amount of dividends paid to shareholders.
"Headwinds to the New Zealand economy are strong. Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing. You should ensure that your bank is well placed to manage the impacts of these headwinds on your balance sheet and to assist customers during challenging times," Hawkesby told the banks.
4 Comments
Better dividends taxed appropriately than share buybacks, untaxed and even more speculative.
The whole framework of shares should reward paying dividends by mature firms and punish speculative share buybacks, especially when firms use credit to buy their own shares back due to relatively low interest rates.
So, letting the banks empty their pockets before the real housing issues come home to roost... just more cost to put on the taxpayer when the OBR event unfolds.
I'd have chosen for them to hold all profits in NZ until well after the housing correction had bedded down and the dust and tears had settled, but no, the RB thinks it's better for the banks to leave kiwis holding the can instead.
As always, privatise the profits, socialise the risks. Remind me please, who is the RB supposed to be protecting?
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