BOJ - @CentralBankJA - has announced that all Deposit Taking Instititions will stop paying dividends for the FY 2020 and will postpone distribution of FY 2019 dividends.

This is an important move to protect the stability of the financial system.

#FinanceTwitterJa

//Thread https://twitter.com/kalilahrey/status/1253773758109753344

For starters, let me just say that I am empathetic to any pensioners or shareholders that rely on dividends as their primary (only) income stream.

But here is why this move is very important and the lessons we should all keep in mind going forward.

Right now, the world is facing a health crisis that has created an economic crisis (ie job losses, company closures, paychecks being cut/reduced, revenue & profits being hit).

It has also created opportunities for some, but in the immediate term those that capitalize...

on the opportunities will not be able to completely make up for the shortfall created by the crisis.

So there will be temporary dislocation created by this economic crisis.

However, this economic crisis can be fixed.

The solution is:
- Try to keep economic activity alive as much as possible for as long as possible.

To achieve the point above, there are two main tactics:
- Put cash in people’s hands via a cash transfer (that’s what the CARE programme is designed to do)
- Maintain credit

Credit is maintained by preserving the integrity of the financial system (ie making sure banks remain stable & solvent).

BOJ has come out aggressively and announced a raft of measures designed specifically for this purpose.

See the thread below. https://twitter.com/marcgayle/status/1243192340677906434

Any dividends that any company pays out, temporarily weakens the capital base of the company.

Primarily because it pays out equity which means that the proportion of debt to equity increases because it has reduced equity.

In normal times this is fine...

typically because of the profits earned this year the company decides they don’t need to retain all of it they can pay out some % and still have enough leftover to reinvest in growth in the business.

We are NOT in normal times.

We are in the middle of an economic crisis.

The absolute last thing we want right now is a financial crisis on top of the economic crisis.

A financial crisis is when banks start failing and the government has to bail them out. That’s absolute worst case scenario.

That exacerbates everything and makes it all worse.

So one of the first, easiest things, that any company can do to shore up its capital position (ie strengthen its balance sheet) is to build equity by cutting dividends and buybacks.

Next step after this is cutting expenses (layoffs usually), and then also renegotiating debt...

or raising new equity capital.

Now is not the right time to be raising equity capital and doing massive layoffs. While layoffs would temporarily make things better for an individual bank (from an expense perspective) it would worsen the economic crisis.

That would ultimately make things worse for the banks in the short term.

So, even though this move is going to be painful for anyone that relies on dividend income, it is in the best interest of the entire system (ie the country).

In fact, what the banks have been doing is actually counter to what is in their best interest.

From the jump, they all (or most) put out programmes to help borrowers in the short term.

They had moratoriums of various kinds (ie a break from payments on loans of various types).

They also have low interest rate loans and other facilities for SMEs and others right now to help tide them over.

They do this DESPITE the fact that many existing clients have already started missing payments and such.

So their profitability is already threatened.

But they understand that profits today can be foregone and they can survive.

Right now, it is very important that the system survives and that means that people (and companies) still have access to credit (even though it may be painful).

System survival is Priority #1.

What I can say is that even though there are many things wrong with the banks, and as someone that runs an SME and has to deal with them a lot I feel the pain personally, their actions from the jump have been very proactive and “nation-first”, not selfish.

The banks should be applauded for this posture because they could have easily taken another posture like many of the banks in developed economies.

So we are still in the middle of this crisis, and we aren’t sure when it will be fixed.

But we know that we need strong banks.

This dividend (and I imagine share buyback) suspension is the right move in very uncertain times.

This move helps to preserve capital within the DTIs so they can do their part to keep extending credit and keep people employed.

That should be their #1 focus.

I will be on @Nationwideradio at 5:30pm today discussing this some more so tune in then!

#FinanceTwitterJa