The UK’s big five banks will be able to restart modest dividend payments next year after the banking regulator lifted its temporary ban.
Shares in lenders Lloyds Banking Group PLC (LON:LLOY), NatWest Group PLC (LON:NWG) and Barclays PLC (LON:BARC) all fell more than 4% on Friday as the Bank of England set ‘guard rails’ limiting how much they could pay out.
Overnight, the BoE’s Prudential Regulation Authority arm, which back in March had told the banks to hold fire on dividends due to concerns about the potential effect of the coronavirus pandemic, said its assessment was that banks are sufficiently “well capitalised and able to support the economy”.
As a result, it felt there is “scope for banks to recommence some distributions should their boards choose to do so”.
But it said these payments should be “prudent”, noting that there are still high levels of economic uncertainty as a result of the pandemic, with ongoing economic disruption from the effects of the virus and with widespread government economic support still in place.
Distributions to ordinary shareholders by large UK banks should not exceed the higher of 20 basis points of year-end risk-weighted assets and 25% of combined 2019 and 2020 profits excluding one-off intangible impairments and net of prior shareholder distributions in that time, the PRA said.
This was estimated to amounts to maximum dividend yields ranging from 1.6% for Lloyds to 3.2% for Barclays, according to analysts at UBS, saying the distributions will be “modest overall”.
The PRA told banks they must also exercise a “high degree of caution” in making decisions about cash bonuses and said it will scrutinise proposed pay-outs closely.
According to their most recent results, Lloyds had a capital reserve ratio of 15.2%, which is above the 15% level at which ended last year when it paid out a final dividend of 2.25p per share, totalling £1.6bn.
For HSBC PLC (LON:HSBA), its CET-1 ratio was 15.6%, for Barclays it was 14.6%, Standard Chartered PLC (LON:STAN) reported a capital ratio of 14.4% and strongest of all was NatWest with a ratio of 18.2%.
The UBS analysts said: “It is somewhat surprising that this announcement has been made ahead of the (current) Brexit talks deadline.
“But perhaps regulatory intervention in dividends in the event of a no deal Brexit is unnecessary: we’d expect all boards to hold fire on distributions until the initial macro and market volatility dissipates whatever balance sheet strength is in evidence at 4Q20.
“A combination of COVID and no-deal Brexit, potentially combined with negative interest rates, would be no environment for increasing bank leverage.
With the European Central Bank keeping mum on the topic of payouts, UBS expects clarity next Tuesday at the ESRB meeting.
“The market will have to be content to remain focussed on longer term recovery value and payout potential.”
The dividend decision came alongside the FRC committee’s twice-yearly financial stability report, which after a deep examination of the British banking system concluded that is well set up to absorb even a significant economic slump in 2021.
Britain’s banks could withstand £200bn of credit losses next year, the central bank reckons, which could occur if unemployment mushrooms to 15% and house prices dive 30%.
“Although there have been encouraging developments on vaccines, the committee, consistent with its remit, is focused on the range of downside risks that remain,” the report said.
“These include risks that could arise from the evolution of the pandemic and consequent measures to protect public health, as well as from the transition to new trading arrangements between the European Union and the United Kingdom.”
The Bank suggested it may also loosen requirements for banks to ensure people taking out new mortgages prove they could still pay the mortgage if their interest rates rose by three percentage points from the offered rate.
This test, which has been in place since 2014, is thought to have stopped many people from being granted home loans.