Banking dividend limit comes to an end

Income investors could hope to see a revival in banking dividends next year as restrictions on dividend limits enforced by the regulator will end at the start of 2021.

Banks were currently restricted by the Australian Prudential Regulatory Authority (APRA) to only pay out dividends of less than 50% earnings.

However, the regulator had since announced this week it would no longer hold banks to a minimum level of earnings retention from the start of 2021.

It said: “Since July, there has been an improvement in the economic outlook, bank capital and provisioning levels have strengthened, and the majority of loans that were previously granted repayment deferral have recommenced repayments. However, a high degree of uncertainty remains in the outlook for the operating environment”.

In a BetaShares webcast, chief economist David Bassanese, said this would be a positive for income investors, particularly retirees, who relied on banks for their strong dividend payouts.

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“The underperformance of Australian banks could be over and we think banks will do reasonably well over the next few months. They will be no longer restricted on their dividends so that’s good news for those who rely on bank dividends,” he said.

While financials had underperformed this year, Bassanese said they could have “their time in the sun” next year as investors rotated back into the sector. Of the big four banks, only Commonwealth Bank had seen positive returns since the start of the year while the ASX 200 returned 2.3%.

“Financials and energy stocks could have their time in the sun next year, we are seeing a rotation back to those sectors,” he said.

“Non-US regions such as Australia and emerging markets could also do well. In the next three to six months, we think technology will hold up and over a longer period of two to three years, we still back technology versus other sectors.”

Performance of big four banks since start of the year to 14 December 2020