RBNZ winds back dividend restrictions for banks

The Reserve Bank of New Zealand (RBNZ) – Te Pūtea Matua – has signalled that its 50 per cent dividend restriction will lift from 1 July.

In March 2020, the RBNZ had placed a complete restriction on banks paying dividends to their shareholders, prioritising financial stability during a time of heightened uncertainty in the global economy.

But a year later, it decided to ease the restrictions, allowing the banks to pay up to 50 per cent of their earnings as dividends to their shareholders.

RBNZ deputy governor Christian Hawkesby commented that the restriction wind back is subject to no significant worsening in economic conditions.

The Reserve Bank is also expecting that the banks will prioritise their support for households and businesses while assessing how much they dole out to shareholders.

As such, Mr Hawkeby wrote in a letter to bank chief executives that they will need to stay vigilant, particularly around the housing market.

“Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing,” he wrote.

“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.”

He also noted that the greater economy is still volatile.

“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,” Mr Hawkesby said.

“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.”

New Zealand banks will also need to account for higher capital requirements, which will apply from the same date as the removal of dividend restrictions (1 July), as set out in RBNZ’s capital review.

Total capital requirements, including the Prudential Capital Buffer (PCB), will gradually increase from the current capital ratio of 10.5 per cent of risk-weighted assets to 18 per cent in 2028 for institutions classified as Domestic Systemically Important Banks (D-SIBs).

For other banks, the total capital requirement, including the PCB, will lift from 10.5 per cent to 16 per cent.

The first 1 per cent rise in total capital required will start from July and will only apply to D-SIBs.

The RBNZ has reported that Kiwi banks are well positioned to meet the new 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 per cent 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,” the RBNZ said in a statement.

“If dividends are lower, at 30 per cent of profits, banks would be able to meet capital requirements comfortably.”

However, the RBNZ stated that its regular suite of prudential settings will continue to include the automatic application of dividend restrictions if the banks’ capital ratio falls below key thresholds.

In Australia, APRA had also placed a dividend restriction on local banks in July 2020, at the height of the pandemic, deciding that banks should retain at least half their earnings and reduce shareholder dividends.

But the restriction was eased from the start of 2021.

[Related: ANZ predicts 40-bp cash rate hike for June]