As we will find out in just over a month, Australian banks will have more freedom on dividend payouts to shareholders than their American peers which have just been told they will have to wait a further three months (at a minimum) before they can return to the status quo of boosting returns to shareholders.
The US Federal Reserve told American banks late last week that they will have to wait until June at the earliest before they find out whether they can boost dividends and resume buybacks. It’s a restriction that no longer applies to Australian banks.
The ANZ, NAB and Westpac all report their March 31 interims in the first week of May (along with Macquarie). The quartet rule off their latest financial periods (Macquarie is a full year) on Wednesday, March 31.
Analysts expect all four banks will either lift dividends or return to paying dividends (compared to the March, 2020 half year) after APRA gave them the clearance to do so in December.
This covers dividends – unlike US banks, Australian banks are not approved to do share buybacks (APRA, the key regulator has barred the practice).
Up to last year buybacks were (controversially) a part of normal capital management by US banks, in addition to dividends, but Covid and the need for banks to conserve cash saw the rules changed by the Fed.
The Fed had said in late December that it would begin allowing regular dividends and buybacks in the March quarter of 2021 (After they were barred from the first quarter of 2020) but revealed the latest three-month extension to June 30 late last week.
And they will have to pass the current round of stress tests the Fed is currently conducting before being allowed to boost dividends and resume buybacks.
The Fed bar on buybacks and higher dividends meant the biggest Wall Street banks (Goldman Sachs, JPMorgan, City, Morgan Stanley, Wells Fargo, Bank of America and others) were limited to paying dividend in 2020 based on the bank’s actual income (profits).
“The banking system continues to be a source of strength and returning to our normal framework after this year’s stress test will preserve that strength,” Vice Chair for Supervision Randal Quarles said in a statement.
The big US banks bought back $US80.7 billion of their shares in 2020, with most coming before the pandemic hit in February and March.
The Fed said that lifting the restrictions only applies to institutions that maintain proper capital levels as evaluated through the stress tests.
Under normal circumstances, capital distributions are guided by a bank’s “stress capital buffer,” a measure of capital that each bank should carry based on the riskiness of its holdings.
The income-based measures were introduced last year as a safeguard to make sure banks had enough capital as the pandemic tore through the US economy.
Any bank not reaching the target at June 30 will have the pandemic-era restrictions reimposed until September 30. Banks that still can’t meet the required capital levels will face even stricter limitations.
The financial sector is one of the stock market’s leaders this year, with the group up 14.7% year to date on the S&P 500 which is only up around 4.4%.
And we are talking about large amounts – the buybacks and dividends could total 10% of the market value of these banks between the 4th quarter of this year and the third quarter of 2022, according to Bank of America analysts.
In the case of Bank of America, the buyback could top $US30 billion; JP Morgan: $US46 billion; Citi: $US14 billion; and Goldman Sachs: $US11 billion.
But could the money spent on the buybacks be better used?
Wall Street’s best bank performance measure, the KBW Bank Index, is up more than 20% in 2021 and 70% in the past year of COVID. That means any buybacks will be at high or record prices, which makes buybacks very expensive and a waste of money (buybacks are best done when share prices are lower or under pressure because they help steady market nerves).
Buybacks use up money which could, in times like the present be better directed to loan making with higher returns.
US economists think that with the economy growing more strongly than expected and more stimulus – especially for infrastructure – lending money to corporate America will generate better returns than handing capital back to shareholders who will only reinvest it in the stockmarket and not the real economy.
Analysts and greedy investors love buybacks, regulators are wary, especially if financial markets soften and strains develop.
