From my AFR column today: "I don't think Australian bank shareholders are cognisant of the risk that if equity capital ratios fall modestly, there are new automatic restrictions imposed by the regulator on the distribution of earnings that mean dividends may not be paid. In fact, it is likely that some banks will stop paying dividends altogether in the next recession as they rebuild capital eroded by loan losses. This column first publicly canvassed these hazards in August in the context of additional tier one capital (AT1) securities (or "hybrids"). The chairman of the Australian Prudential Regulation Authority, Wayne Byres, has confirmed our analysis that APRA will garnish 40% of a major bank's earnings from being used for dividends, AT1 hybrid coupons and/or staff bonuses if their common equity tier one (CET1) capital ratio falls below 8%. If equity declines to less than 7.125% (6.25%), APRA will restrict 60% (80%) of total earnings. A formal stop on all payments to equity and hybrids kicks in when the CET1 ratio hits 5.375%." Read free: (VIEW LINK)
Christopher Joye is Co-Chief Investment Officer of Coolabah Capital Investments, which is a leading active credit manager that runs over $2.2 billion in short-term fixed-income strategies. He is also a Contributing Editor with The AFR.
What will APRA use to "garnish" the bank's earnings - plain old tomato sauce? Or maybe some hot chilli sauce? Depends on the level of the crisis, I guess.