The Australian Prudential Regulation Authority (APRA) has warned banks not to erode its capital reserves to pay larger dividends to shareholders.
In a report exploring the current risk environment of the authorised deposit-taking institution (ADI) industry, APRA noted the continued profitability of the sector had been a key driver of growth in capital ratios over recent years, with the retention of profits and contributions from dividend reinvestment programs (DRP) responsible for most of the increase capital.
"More recently, ADIs have implemented various capital management initiatives that have started to slow the build-up of capital from profit retention," APRA said.
"Such initiatives have included removing discounts on dividend reinvestment programs, raising actual and target dividend payout ratios, paying special dividends and neutralising dividend reinvestment programs."
APRA said lenders' needed to carefully consider capital initiatives to ensure adequate buffers are built and maintained above the Prudential Capital Requirement specifically set by the regulator for each bank.