NatWest and Lloyds Banking project to be dividend kings as bad debt outlook improves

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We are in the UK banking results season and generally, the banks are either feeling better about bad debts or reporting improving trends.


The latter basically means things are still a bit hairy out there but the situation is not deteriorating as quickly as in the preceding quarter.


Meanwhile, all of the major UK-listed banks are ship-shape and Bristol fashion when it comes to common equity tier 1 (CET1) ratios – a measure of their balance sheet strengths.


The solid balance sheets and the strong possibility that the banks might have been overcautious in their assessment of potential bad debts opens up the prospect that the banks, when fully released from constraints on dividend payments, could go back to being among some of the best dividend payers among blue-chip stocks.


Some, understandably, seem to be holding off on making promises until the government’s furlough support scheme ends on September 30 (unless it is extended), while all are waiting for the Prudential Regulation Authority (PRA) to issue new guidance on dividend payments; the PRA is expected to make its pronouncement before the major banks issue their interims.


Given all of that, it might be worthwhile having a quick shufti at the banks’ recent announcements to assess the trends.


Barclays


Barclays PLC (LON:BARC) is set to announce its first-quarter results tomorrow, but in its results for 2020, its credit impairment charges totalled GBP4.8bn, compared to GBP1.9bn the year before. That included a GBP2.3bn of non-default provision for “expected future customer and client stress”.


The fourth quarter saw the credit impairment charge fall 19% from the previous quarter at GBP0.5bn and was also down 6% year-on-year.


The CET1 ratio at the end of 2020 stood at 15.1%, up half a percentage point (50 basis points, if you prefer) on the preceding quarter.


The bank paid a dividend in respect of 2020 of a penny. With the shares at 190p or thereabouts, that gives a yield of 0.5%, which won’t get anyone’s pulses racing but the bank has at least “shown willing”. Based on broker dividend forecasts for three years in the future, that will gravitate to 5.1% based on the current share price.


HSBC


The Asia-focused bank has announced its first-quarter results for 2021, and in its statement it said, “While there continue to be interest rate headwinds, expected credit losses and other credit impairment charges (‘ECL’) fell, reflecting the improved economic outlook.”


HSBC PLC (LON:HSBA) essentially clawed back US$0.4bn of its provision for ECL, which stood at US$8.8bn at the end of 2020, of which US$3.0bn was set aside in the first quarter of 2020.


The CET1 ratio of 15.9% was unchanged from the end of 2020.


The bank said it would not pay quarterly dividends during 2021. Boo!


It will consider whether to announce an interim dividend at its 2021 half-year results in August. Huzzah!


Broker forecasts currently have the dividend yield three years in the future rising to 5.5%.


Lloyds Banking Group


Lloyds Banking Group PLC (LON:LLOY) has also weighed in with its first-quarter numbers and revealed a net impairment credit of GBP323mln, driven by a GBP459mln release given the UK’s improved economic outlook.


That reduces provisions from the massive GBP4.2bn for the whole of GBP4.2bn, most of which – GBP3.8bn – came in the first half of the year.


The CET1 ratio of 16.4% before dividends and 16.2% after them is well ahead of the bank’s target of around 12.5% and regulatory requirements of a rate around 11%.


The lender will update the market on interim dividend payments with the half-year results.


The forecast dividend yield for 2024 is 5.8%.


NatWest Group


NatWest Group PLC (LON:NWG) was another bank announcing the release of provisions set aside for bad debts in its first-quarter update.


A net impairment release of GBP102mln in the first quarter of 2021 reflected releases in non-default portfolios, principally in its Commercial Banking arm, the lender said.


To put that into perspective, full-year 2020 net impairment losses totalled GBP3.24bn, of which GBP2.86bn was booked in the first half of the year.


The CET1 ratio was a very impressive 18.2% – I’ve just checked and this is the company that a year or so ago was known as Royal Bank of Scotland – albeit down from 18.5% at the end of 2020.


Subject to economic conditions being in line with, or better than, the bank’s central economic forecast, NatWest Group intends to maintain ordinary dividends of around 40% of attributable profit and aims to distribute a minimum of GBP800 million per annum from 2021 to 2023 via a combination of ordinary and special dividends.


On top of that, it expects to carry on buying back the UK government’s stake. Despite that, brokers are pointing to a dividend yield of 6.0% three years hence, putting it at the top of the class.


Standard Chartered


The exposure of Standard Chartered PLC (LON:STAN) to the UK economy is tangential but it operates in the world where the COVID-19 virus originated so it is obviously not immune to the impact of the pandemic.


Having said that, it announced in its first-quarter results that it expects impairment charges to reduce significantly year-on-year in 2021.


The first-quarter impairment charge was a barely noticeable US$20mln – hardly enough to refurbish an upstairs flat in London SW1 – and US$936mln lower than in the same quarter of 2020 and US$354mln lower than in the preceding quarter.


The CET1 ratio eased to 14.0% from 14.4% at the end of 2020 but that’s right at the top end of the bank’s target range of 13-14%.


By the standards of the sector, the prospective 2024 dividend yield is a bit skinny at 4.5% but better than the interest rate you can get from savings accounts offered by most banks.

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