It is perhaps time for investors to temper their expectations of future dividends from their bank holdings.
The key takeaway from the latest report from the financial services regulator, Australian Prudential Regulation Authority (APRA), is that banks and investors alike should prepare for the realistic possibility the deluge of dividends might not last. APRA’s ‘Insights’ report is one of the few ways it can communicate its views to a wide audience, sounding a potential warning.
Evidently this is not the time to be lulled into a false sense of dividend assurance from the banks.
When extra capital was needed during the 2010 financial year to sharpen balance sheets, banks slashed dividends accordingly. Chopping dividends had investors crying their living standards would slide. For a self-funded retiree the total loss of income from bank shares in that fateful financial year fell 15 per cent from the previous 12 months.
Heed APRAs report. The reality is this could happen again. With a string of stringent capital requirements coming into effect, profits may need to be held to meet capital requirements instead of being paid out as dividends.
APRA’s concern is fueled by the possibility low interest rates could fuel bad loans in the near future, caused by a reversal in interest rates, falling property prices and/or rising unemployment.
Consequently, there would be less flexibility to pay out the same proportion of dividends investors have become accustomed to and are used to demanding.
Improved economic and business conditions for the banks has allowed an increasing proportion of profits to be paid out to shareholders. This won't be a trend that continues forever.
Digging through APRA’s latest insight shows our banks are well ahead of where they need to be come January 2016 in terms of capital management. But it doesn’t take long for things to change dramatically and dividends would be the first sacrifice if capital management was required once again.