Correction: Subsequent to publication, the SA Reserve Bank alerted us to a guidance note that had been published on 18 February that changed the Bank’s guidance on the payment of dividends and bonuses by banks. The guidance note no longer “discourages” the payment of dividends but notes the Bank is confident “that the respective boards of directors of banks will act prudently and will duly take into consideration, among other things, the current and anticipated capital levels of their banks, the current and future impact of COVID-19 and the slow pace of economic growth on the safety and soundness of their respective institutions” when approving dividends or bonuses.

This column was first published in Business Day.

Not long ago it made more sense to put your money in the shares of a bank than in the savings accounts it offered. For the last decade banks have on average paid dividends of about 4% of the share price, and shortly before the pandemic big banks were paying as much as 9% — considerably more than most paid in (after-tax) interest even for fixed deposits.

On top of that yield, you could look forward to capital growth as a sweetener (though, of course, take the risk of capital loss). Because of this, bank stocks were popular among those seeking income from their investments, people such as pensioners who live off their savings.

However, that came to an abrupt halt with the Covid-19 pandemic.

In an early move to protect the banking sector from the inevitable credit market fallout, the SA Reserve Bank loosened the capital requirements for banks, the “buffers” of shareholder money that banks accumulate in good times so that they can ride through the bad.

The problem is that when banks are told they don’t need to hold as much capital, they may feel entitled to pay out more as dividends. Banking after all is a game of holding just enough capital to avoid excessive risk, but not too much to damage your return on shareholder money. So, the Reserve Bank also banned the distribution of capital through dividends and bonuses. Well, not “banned” exactly, but “discouraged”, which in central banking language is about the same thing.

That was back in April 2020 when the economic fallout of the pandemic was tough to predict. Bank analysts (including me) believed the global financial crisis was as good a road map as we have, and that didn’t look good for banks. So, the central bank did the prudent thing and declared this was what buffers (invented after the financial crisis) were made for and it was time to let banks eat into them. The corollary, however, was that they had to cease paying dividends.

Almost a year later, though, most banks are coping with the pandemic reasonably well. None of the large banks have lost money. They are now busy tallying up their results for the year to end-December, and the guidance to the market has been that profits are down roughly 60%, but still in positive territory. Credit performance has been bad, but not as bad as predicted, with 5.18% of books impaired at end-December from 3.89% a year earlier, but way off the global financial crisis level of 5.94% reached in 2009.

That means they have been profitable and capital levels have not been under huge pressure. Indeed, the sector’s total capital adequacy ratio of 16.6% is slightly higher than before the crisis hit, and way higher than it was back in the financial crisis (13.01% in December 2008). The big four banks are all far above the minimum capital requirements, on the last Basel 3 capital disclosures made in September 2020.

The problem is that the Reserve Bank’s directive remains in force. So, banks are still discouraged from paying dividends (or capital damaging bonuses) even though the conditions are somewhat better than expected.

Banks, of course, do not like this. Executives have two reasons to gripe — bonuses can’t be paid at the expense of capital (though definitional greyness gives wiggle room). Also, by forcing banks to hold excess capital, banks’ return on equity is weaker simply because there is more equity. It is also bad for wider constituencies: those income-needing shareholders, as well as foundations of banks, that usually have dividend streams as their sole source of funding for the philanthropic work they undertake.

Given market conditions, the Reserve Bank should have shifted language from “discouraged” to something more like “only with the utmost prudence”. It could also have attached discouraging language on the use of capital buffers as a first step to re-establishing them. The buffers are not being used by the big banks (or any others, as far as I am aware) and there really is no reason that shareholders should be starved of cash.

With banks announcing results over the next three weeks, expect much griping about the dividend constraint. While in theory banks could ignore the Reserve Bank and go ahead with dividends, that sort of relationship faux pas is not one bankers do, no matter how much pressure they may be facing from shareholders. While the Reserve Bank is the custodian of the riskiness of the system and has done an admirable job of proactively managing bank capital in the face of the crisis, it should now walk back some of its restrictions.

Theobald is chair at Intellidex.