(Adds analyst, shares reaction)
By Paulina Duran and Byron Kaye
SYDNEY, July 29 (Reuters) - Australia's financial watchdog on Wednesday withdrew a request for banks and insurers to freeze dividends due to the novel coronavirus, but ordered them to pay less than half their profit to shareholders for the rest of the year.
The Australian Prudential (LON:PRU) Regulation Authority (APRA) asked the financial sector to defer paying dividends in April as government agencies raced to protect the economy from roiling financial markets and shutdowns of travel and most community activity. new guidance pushed banking shares higher, as the directive allows some of the country's biggest companies to resume payments to shareholders. It will also ensure they keep a larger than usual buffer against further financial shocks, the regulator said.
"Although the environment remains one of heightened risk, we now have a stronger sense of how Australia's economy and financial institutions are being impacted by COVID-19," APRA Chair Wayne Byres said in a statement.
"Banks and insurers do not need to continue to defer capital distributions, provided they moderate payments to sustainable levels based on robust stress testing, and continue to prioritise supporting their customers and the economy."
The change comes soon before the country's largest bank, Commonwealth Bank of Australia CBA.AX and many other Australian companies report annual results, when they typically declare final dividends.
"We believe this significantly increases the probability of CBA declaring a final dividend with its results release on the 12th of August," said Azib Khan, an analyst at Morgans Financial.
CBA, which has a different reporting date to Australia's other big banks, gave its last dividend announcement before APRA's initial directive. It is due to post its full-year results on Aug. 12.
APRA's guidance was not mandatory but Westpac Banking Corp WBC.AX , Australia and New Zealand Banking Group Ltd ANZ.AX , and National Australia Bank Ltd NAB.AX , deferred or cut dividend payments worth over A$7 billion.
Shares in the four major Australian banks were all over 2% higher on the news.