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The Reserve Bank’s Prudential Authority says banks can move forward with paying dividends as they put the finishing touches on their 2020 financial results. Some banks have already warned shareholders not to expect a payment.
The Reserve Bank of South Africa has thrown a curve ball at banks as they prepare to release their 2020 financial statements in the coming weeks: They can now pay dividends to their shareholders if they can afford it.
Most banks refrained from paying dividends they had not yet declared in 2020 after the SARB’s Prudential Authority (PA) issued a guidance note in April advising them not to make shareholder payments or bonuses. cash to senior executives due to increased stress from Covid -19 was likely to be placed in the banking system.
In return, it provided temporary regulatory relief to banks, including a reduction in the capital they had to hold to cover their risk-weighted assets, a lower liquidity coverage ratio, and principal relief on restructured loans that were current prior to the pandemic.
In an updated guidance note that went unnoticed last Thursday, the Palestinian Authority said banks could resume distributions and bonuses, but they should continue to exercise prudence. It added that the benefits of the relief measures it provided in 2020 should not be used to pay dividends or bonuses.
While the SARB was in tune with its global peers, including the Bank of England (BoE), in guiding the dividend suspension last April, its new guidance comes at the end of the day. The BoE revised its guidance in early December, saying that the UK banks remained well capitalized and it was hoped that they could continue to support the real economy through the Covid-19 disruption.
It turns out that South African banks have held up pretty well too. While most have already warned that earnings will be significantly lower for the year, largely as a result of higher credit impairments and higher provisions for bad debts that may still arise, they have not been as bad as anticipated.
Recent trade statements also indicate that the worst may be over, with delinquent loans performing better than expected. Still, earnings remain under pressure due to weaker activity as a result of the weakening economy.
“The credit environment has been better than some of the worst-case scenarios anticipated at the beginning of the pandemic when the SARB decided to give banks access to the capital buffers that build up in good times,” said Intellidex Chairman Stuart Theobald . Business maverick.
“As a result, most banks, including the largest, have not needed to use these mattresses.
“There does not appear to be any good reason not to pay dividends, and on Thursday the SARB changed its orientation from discouraging payment to doing so if it was prudent. Of course, boards should always be prudent in deciding to pay dividends, but the SARB is clearly trying to use moral suasion to tell boards not to pay dividends that could jeopardize any of the key equity ratios. He has also said that the Pillar 2A dampers will be reintroduced. “
As it stands, it is unclear whether the banks will change their plans and announce payments at this late date. Absa, which publishes its annual results on March 15, said in November that it did not plan to pay an ordinary dividend for 2020 as it was focused on preserving capital. In accordance with previous SARB guidance, it also did not declare an interim dividend. Last week, the bank led shareholders to expect a 50% to 55% decline in overall normalized earnings per share for the year through the end of December, so if you change course and announce a dividend, chances are that lower by a similar margin.
Similarly, Nedbank told investors in December that it was unlikely to declare a final ordinary dividend in support of capital preservation and as long as the guidance from the SARB was maintained.
Standard Bank has been less defined with its plans. In an update in November, it said it would review its capital position in March, as well as regulatory guidance, before deciding on a final dividend for 2020. At the time, it said its capital and liquidity levels remained well above regulatory minimums and its own internal risk threshold.
FirstRand, which reports interim results next week, has not mentioned a dividend after it withheld a final dividend for its 2020 financial year.
“The challenge for banks is that the guide arrived at the end of the day; now they are finalizing the figures for the end of the year and in most cases they would have already made decisions on dividends, “said Theobald.
“I believe, however, that shareholders will wait for the boards to go back to the drawing board to determine dividends. Banks are considered stable dividend payers and will not want to neglect this key attribute of their investment case.
“So I hope they will be quick to determine a dividend, although this may be below their usual dividend policy to signal caution in the face of the unknowns about the pandemic.” DM / BM
