Warning with bank dividend reprieve

South Africa’s banking regulator has eased guidance to lenders that they shouldn’t pay dividends and executive bonuses – though warned that protecting cash reserves must still take priority amid ongoing uncertainty from the Covid-19 pandemic.

Where boards approve such payouts, they should be “prudent and commensurate with the assessment of current conditions and potential future uncertainty”, Prudential Authority chief executive Kuben Naidoo said in a note to the industry.

Banks should also refrain from using proceeds from regulatory-relief measures for either of those purposes, he said.

“Banks play a critical role in continuing to provide the necessary required funding to the wider economy,” said Naidoo, who is also a deputy governor of the South African Reserve Bank (Sarb). “In light of this, it is essential that banks conserve their capital resources, among other things, to continue to retain their capacity to support.”

The instruction is a relaxation of a guidance issued by the Prudential Authority 10 months ago, that lenders should withhold dividends and bonuses.

Vaccine roll-out

The game changer may be the international roll-out of vaccines, which has prompted Sarb to revise global growth forecasts for 2021.

“The Sarb ideally would have liked to keep their previous guidance in place for the remainder of this year,” said Nolwandle Mthombeni, senior banks analyst at Intellidex. “However, banks are sufficiently capitalised and have shown resilience and therefore are in a better position to pay dividends...”

While Investec unexpectedly announced a first-half dividend in November, larger South African rivals such as FirstRand and Standard Bank held off in 2020.

The central bank extended regulatory relief to banks while urging them to preserve capital in April, a move designed to help lenders and their customers avoid loan defaults.

Borrowers were granted payment breaks, and lenders introduced a credit-guarantee programme backed by government to aid small and medium-sized businesses.

“The Prudential Authority considers it critical that banks continue to fulfil the fundamental role of providing the required funding, among other things, to households and businesses amid the Covid-19 pandemic,” Naidoo said. –