Brace for lower dividends, fewer buybacks if bank hybrid rules change
Investors should brace for lower dividends and fewer share buybacks from the major banks if they are forced to reduce their reliance on popular, but complex, hybrid bonds to meet capital requirements.
The Australian Prudential Regulation Authority probe into whether to limit the bonds, worth $37 billion to Commonwealth Bank, Westpac, ANZ, and National Australia Bank, “results in greater risk of surplus capital not being returned to shareholders”. That is according to E&P’s Azib Khan, who said banks could even have to raise capital from shareholders after the inquiry.
The total wipeout of Credit Suisse hybrids has raised alarms at APRA over the effects such an event could have in Australia. Paul Rovere
As the banks’ net interest margins recede, Mr Khan said, the “silver lining” for investors was the prospect of share buybacks or increased dividends, given the excess cash these institutions hold.
“However, this prospect has dimmed with APRA’s discussion paper,” he said.
APRA requires that banks hold enough easily accessible capital such as cash, stock or retained earnings – also known as tier 1 capital – equal to 4.5 per cent of outstanding loans, and this requirement scales up the larger the institution.
Banks will supplement these holdings with hybrid bonds, which pay interest to holders and are typically seen as a safe investment by retail buyers. But if a bank faced difficulty, it could exchange the bonds for shares or, if the situation is serious enough, regulators can wipe them out entirely as was the case in UBS’ $4.5 billion shotgun marriage to Credit Suisse earlier this year.
It raised alarms at APRA given the follow-on effects such an event may have in Australia, with the watchdog last week calling for feedback
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