The SARB’s Prudential Authority (PA) issued a guidance note advising that it did not expect banks to distribute dividends on ordinary shares or pay cash bonuses to senior executives in 2020. This guidance is not binding on banks but is recommended. In terms of section 46(2) of the Companies Act 2008 resolutions authorising a distribution that have already been properly adopted by a bank’s board must still be fully carried out.

In his address to the nation, on the nationwide lockdown to be implemented in South Africa in response to the COVID-19 pandemic, President Ramaphosa stated that the banking system would remain open and the JSE would continue to function. He also reported that the South African Reserve Bank (SARB) had committed to doing ‘whatever it takes’ to ensure that the financial sector operates well during the pandemic.

SARB’s responses to the COVID-19 pandemic

SARB announced on 25 March 2020 that it would take the unprecedented step of purchasing government bonds on the secondary rather than from the primary market (Treasury). The purpose of this was to inject some liquidity into the bond market in light of the large-scale sell-off of government bonds that had taken place.

On 28 March 2020 SARB announced three proposals designed to shore-up banks’ balance sheets and enable them to assist distressed clients. These proposals entailed lowering liquidity coverage ratios and minimum requirements for capital and reserve funds. These proposals would enable banks to dip into their own regulatory capital and liquidity reserves to assist their clients who were ‘in good standing’.

On 6 April 2020, PA issued a directive giving effect to the above proposals. However, this directive emphasised that its purpose was to enable banks to assist their clients while maintaining healthy capital positions, but not to provide banks with the opportunity to distribute capital resources through the declaration of dividends or the payment of bonuses to executive officers.

On 6 April 2020 the PA also issued a guidance note advising that it did not expect banks to distribute dividends on ordinary shares or pay cash bonuses to senior executives in 2020.

SARB’s recommendation not to pay dividends and executive bonuses in 2020

SARB’s guidance note caused some initial uncertainty. However, Kuben Naidoo (deputy governor of SARB) provided much-needed clarity, as follows:

  • The guidance note is not binding on banks. Banks can make their own decision as to whether to declare dividends and pay executive bonuses. Banks are merely being urged to consider the economic impact of the COVID-19 pandemic and to preserve their capital accordingly.
  • The position in South African company law is acknowledged (in terms of section 46(2) of the Companies Act 2008, once the board of a company has adopted a resolution authorising a distribution and acknowledging that the solvency and liquidity test will be satisfied after completing the proposed distribution, that distribution must be fully carried out) and the guidance note does not override this position.
  • The guidance note does not apply to dividends that have already been declared.

Many major banks have subsequently indicated that they will be paying 2019 final dividends to shareholders, although they will be guided by SARB’s recommendations as they adapt to operating in the COVID-19 pandemic.