In a move that is likely to feature heavily in deliberations by the boards of SA’s largest banks ahead of the earnings season, the Reserve Bank has authorised banks to resume the payment of ordinary dividends and short-term executive bonuses.
While the central bank updated its guidance last week, the development came to light only on Monday in a directive authored by Kuben Naidoo, the deputy governor and CEO of the Prudential Authority, the regulator of the bank sector.
But Kuben said the industry should tread carefully as it juggles the positive effects of higher economic growth associated with the vaccine rollout, because another economic downturn cannot to be discounted.
The updated nonbinding guidance could turbocharge banking shares, which have been hammered by falling earnings growth as the industry lines up billions of rand in cash to absorb a wave of skipped loan repayments from customers grappling with job losses and deep salary pay cuts.
The JSE banking index has dropped more than 15% in the past 12 months, lagging behind a 17.5% gain on the broader JSE all share index and pushing down valuation levels. Brokerage houses in global giants such as JPMorgan and Bank of America have advised clients to pile into the sector.
Stuart Theobald, the chair of research firm Intellidex, said the financial strength of the banks makes the payment of dividends quite likely.
“None of the large banks have come close to dipping into the buffers on their capital requirements. The industry as a whole has overall capital levels that are slightly higher than they were before the crisis and their common equity tier 1 ratios are around 200 basis points above regulatory requirements. This is a strong position from which to be paying dividends,” he said.
The timing — which comes late in the day ahead of results — may force a rethink for some banks on the dividend policy but it will not be anywhere near the pre-Covid levels.
“Banks will be cautious to signal that there are still a lot of uncertainties so will likely not declare dividends at the same levels as their historical dividend policies,” said Theobald.
The guidance stressed that banks be “prudent and consider the adequacy of their current and forecasted capital and profitability levels, internal capital targets and risk appetite as well as current and potential future risks posed by the ongoing pandemic” when considering paying ordinary dividends and/or executive cash bonuses.
The Reserve Bank moved quickly to ready the financial system for the economic stress caused by the pandemic in 2020 by aggressively cutting interest rates and giving the sector a temporary pass to dip into regulatory capital buffers in exchange for putting shareholder and executive rewards on hold and keeping credit flowing.
The country’s large banks entered the crisis well capitalised, with the liquidity coverage ratio — a Basel III accounting rule that requires banks to hold cash that matches or exceeds projected cash outflows over a 30-day stress period — at about 148%, well above the minimum ratio of 100%. The banks took substantial provisions ahead of expected future bad debts during the course of 2020, which led to lower profitability.
The Prudential Authority explicitly stated in the updated guidance note last week that the benefits of regulatory relief measures should not be used for paying dividends or bonuses, essentially meaning that banks should treat the pre-Covid regulatory and prudential framework as the starting point when considering whether to make any distributions.
Naidoo’s updated guidance comes as the NIDS-CRAM survey says the country has recovered 2-million of the 2.8-million jobs lost during the Covid-19 hard lockdown period from February to June 2020.
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