Bank dividends will be a rare bird this profit season, drawing ire from the banking regulator, and may be paid - at a "materially reduced level" - only if banks offset them with capital raisings, APRA has ruled.
APRA is also calling for "pre-emptive" capital raisings from the industry.
And in further blow, Fitch Ratings last night sliced the AA- credit ratings of Australia's four major banks.
The Issuer Default Ratings of ANZ, CBA, NAB and Westpac Fitch have reduced by one notch to A+ from AA-, with the same cut (to A+) applied to the long term ratings of subsidiaries including ASB and Bank of New Zealand.
Fitch even lowered the short-term rating of the major banks - to F1 from F1+ - a measure of cynicism around the asset quality and earnings outlook for the industry, while ratings on subordinated debt has been lowered by two notches, to A-.
But it is the change of tone in APRA's pointed letter last night to all banks and insurers that will shake any remaining complacency out of bank boards and above all investors, with bank hybrids and bank shares in for another re-rating by the market.
APRA chair Wayne Byres demanded that "ADIs and insurers limit discretionary capital distributions in the months ahead," in a letter no doubt timed to aid the boards of the three big banks and Macquarie that will report either interim or full year results in early May.
Byres made clear that "this [limit] includes prudent reductions in dividends," and in effect APRA seem to be encouraging an outright suspension, a policy that could last into 2022.
"Decisions on capital management," Byres said, "need to be forward-looking, and in the current environment of significant uncertainty in the outlook, this can be very challenging.
"APRA is therefore providing boards with the following additional guidance. During at least the next couple of months, APRA expects that all ADIs and insurers will:
• take a forward-looking view on the need to conserve capital and use capacity to support
the economy;
• use stress testing to inform these views, and give due consideration to plausible downside scenarios, and
• initiate prudent capital management actions, on a pre-emptive basis, to ensure they maintain the confidence and capacity to continue to lend and support their customers."
Byres reiterated the key message:
"APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer," he said.
But the APRA chief humoured the industry with this caveat:
"Where a board is confident that they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level.
"Dividend payments should be offset to the extent possible through the use of dividend reinvestment plans and other capital management initiatives," Byres made clear.
The banking regulator's strident letter will undermine any remaining sense that banks are well capitalised in the face of an extraordinary economic crisis, and Fitch Ratings have become the first credit ratings agency to lower ratings, for the big banks for now. S&P and Moody's must surely soon follow.
The cut in the big four banks' long term ratings to A+, Fitch said, "reflects the agency's expectations of a significant economic shock over the first half of 2020 …. followed by a moderate recovery through 2021."
Fitch said the ratings on the banks "had limited buffers at the previous levels, as reflected in a negative outlook, with an economic shock and further profitability weakness".
"[Banks capital] buffers are more substantial at the new, [lower] rating.
"Nevertheless, further downside risk remains to our baseline case, which is why a negative outlook has been retained on the ratings" for the four major banks, Fitch said.
On Commonwealth Bank, to cite specific comments on just one big bank, Fitch said: "We expect CBA's financial profile, particularly asset quality and profitability, to be significantly affected in the medium term."
Fitch's ratings on the subordinated debt of all four big banks has been cut two notches, to A- from A+.
Among the industry's mass market, business and consumer sentiment is bouncing around but still at very poor levels, a trio of surveys released yesterday confirm.
Drawing on the firm's "Atlas" surveys, Kipling Zubevich, CEO of DBM yesterday said: "68 per cent of consumers and 74 per cent of businesses believe it will take more than six months for the economy to show any signs of recovery.
"While conditions have declined for most business owners (most notably in the retail, wholesale and manufacturing sectors), 30 per cent are yet to experience negative impacts," Kipling said.
The Australian Bureau of Statistics yesterday released its own flash survey that parallel the DBM research.
This shows that "two thirds of Australian businesses (66 per cent) reported a reduction in turnover or cash flow as a result of COVID-19."
The ABS said 24 per cent of businesses deferred loan repayments, 38 per cent renegotiated leases and 16 per cent cancelled investment plans.
Trading terms are up in the air. The ABS said 16 per cent of firms "changed payments terms with customers" while three per cent "changed payments terms with suppliers."
The Roy Morgan Business Confidence index for March 2020 was down 9.5 points, or close to 10 per cent to 95.1, a new record low for this series.