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On 28 March 2020, the European Central Bank (ECB), which is the controlling body of all banks and financial institutions in the European Union, ordered all eurozone banks to suspend dividend payments or any share buybacks that had previously been scheduled for the year. The orders were in a bid to counter the economic effect of the coronavirus pandemic, so that, if the situation worsens, the situation should not become worst.
The move is expected to cause many of the region's largest banks either to cancel or suspend plans to pay their investors or shareholders around billions of euros of excess capital through dividends or share buyback. The European Central Bank has stated that for the last two financial years of 2019 and 2020, the banks would not pay dividends until at least 1 October 2020. The Central Bank also added that for the purpose of rewarding shareholders, they should refrain from share buybacks too.
UK banks suspend dividend and bonuses amidst pressure
The Bank of England (BoE) was also asked by several experts to withhold nearly £8 billion in dividend payments from UK banks for the sake of financial system stability, in line with the latest ECB order. Previously, It was also suggested that UK companies should now cut, postpone or defer dividend payments as a result of the rapid spread of the coronavirus, which has kept the nation shut down, so that they can reserve a certain amount of capital either for day-to-day operations or for potential emergencies, given that the economy is now on the brink of recession.
In the wake of the coronavirus crisis, as well as continuous pressure from the European Central Bank and the Bank of England, Britain's biggest banks have also decided to cancel nearly £8 billion of dividends, offering banks an extra buffer to survive an economic downturn. The Bank of England has also directed borrowers to scrap executive cash bonus programs and has directed the financial firms to raise their resilience ahead of a possible recession.
The UK's largest lenders, including the likes of Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered – in a series of coordinated announcements, declared on Tuesday, 31st March 2020, that they will immediately suspend shareholder pay-outs in the form of dividends as well as share buybacks for 2019 and during 2020 following negotiations with the Bank. The cancellation of the 2019 dividends would give banks an additional financial leverage worth almost £ 8bn in total, as they are forced due to the Covid-19 lockdown to increase lending to businesses and households.
In light of the above-mentioned announcements from the Bank of England and the UK’s largest banks, there has been a buzz in the stock price performances of three of the most important lenders operating in the United Kingdom, to understand how the markets and the shareholders have reacted to the declaration regarding the suspension of dividends and bonuses, let’s go through there price performance.
Barclays Plc
Barclays Plc (LON:BARC) is a banking and financial services company operating out of London, United Kingdom that provides both individuals and institutions with wholesale and retail banking services.
BARC Share Price Performance
At approximately 12:20 P.M. (Greenwich Mean Time) on 2 April 2020, at the time of writing of this article, Barclays Plc's share was registered to be trading on the London Stock Exchange at a value of GBX 84.57 per share, a price increase of approximately 2.06 per cent or GBX 1.71 per share, compared to the share price at the time of closing on the previous day, that had been reported to be GBX 82.86 per share. In writing this article, the company's market capitalization (M-) was estimated to be GBP 14.358 billion in comparison to the company's current market share price.
In the previous one year, since April 01, 2019, when the price of the Barclays Plc share was reported at GBX 158.32 per share, the share has given a negative return of 46.58 per cent in value. The share has given a negative return of around 43.48 per cent in value in the previous six months from the price of GBX 149.64 at the close of the market on October 01, 2019. The company’s share had also given a negative return of approximately 40.98 per cent in value in the previous one month since the close of the market on March 02, 2020, when the price of the share was reported to be at GBX 143.30 per share.
The beta of the company’s stock was reported at a value of 1.31, reflecting the fact that the change of the company's share price is more volatile, as compared to the change in the movement of the benchmark index.
Royal Bank of Scotland Group Plc
Royal Bank of Scotland Group Plc (LON:RBS) is a banking institution, which engages in the provision of multiple financial products and services to industrial, corporate and institutional clients.
RBS Share Price Performance
At approximately 12:25 P.M. (Greenwich Mean Time) on 2 April 2020, at the time of writing of this article, Royal Bank of Scotland Group Plc's share was registered to be trading on the London Stock Exchange at a value of GBX 105.65 per share, a price decrease of approximately 1.26 per cent or GBX 1.35 per share, compared to the share price at the time of closing on the previous day, that had been reported to be GBX 107.00 per share. While writing this article, the company's market capitalization (M-) was estimated to be GBP 12.940 billion in comparison to the company's current market share price.
In the previous one year, since April 01, 2019, when the price of the Royal Bank of Scotland Group Plc share was reported at GBX 247.70 per share, the share has given a negative return of 57.35 per cent in value. The share has given a negative return of around 47.57 per cent in value in the previous six months from the price of GBX 201.50 at the close of the market on October 01, 2019. The company had also given a negative return of approximately 38.60 per cent in value in the previous one month since the close of the market on March 02, 2020, when the price of the share was reported to be at GBX 172.06 per share.
The beta of the company’s stock was reported at a value of 1.50, reflecting the fact that the change of the company's share price is more volatile, as compared to the change in the movement of the benchmark index.
Lloyds Banking Group Plc
Lloyds Banking Group Plc (LON:LLOY) is a banking and financial services provider based out of London, whose primary services include providing retail and corporate banking, as well as life insurance, pension and investment management services.
LLOY Share Price Performance
At approximately 12:30 P.M. (Greenwich Mean Time) on 2 April 2020, at the time of writing of this article, Lloyds Banking Group Plc's share was registered to be trading on the London Stock Exchange at a value of GBX 29.20 per share, a price increase of approximately 3.29 per cent or GBX 0.93 per share, compared to the share price at the time of closing on the previous day, that had been reported to be GBX 28.27 per share. While writing this article, the company's market capitalization (M-) was estimated to be GBP 20.072 billion in comparison to the company's current market share price.
In the previous one year, since April 01, 2019, when the price of the Lloyds Banking Group Plc share was reported at GBX 62.90 per share, the share has given a negative return of 53.58 per cent in value. The share has given a negative return of around 45.30 per cent in value in the previous six months as well from the price of GBX 53.38 at the close of the market on October 01, 2019. The company had also given a negative return of approximately 41.06 per cent in value in the previous one month since the close of the market on March 02, 2020, when the price of the share was reported to be at GBX 49.54 per share.
The beta of the company’s stock was reported at a value of 1.29, reflecting the fact that the change of the company's share price is more volatile, as compared to the change in the movement of the benchmark index.
Comparative Share price chart of BARC, RBS and LLOY
Source: Thomson Reuters, as on 02-04-2020, before the close of the London Stock Exchange Market
Potential Recession in the offing
Many market analysts are of the view that the ensuing recession will be much deeper than the one which followed the 2008 financial crisis, so the banks must keep their balance sheets free as much as they can, to handle a potential rise in a borrower debt default. As part of a package of measures to alleviate the impact of a coronavirus pandemic that included ultra-cheap lenders loans, the ECB has already reduced the sector's capital requirements – forecast at € 120 billion of capital relief that will fund € 1.8 billion of new loans.
With economists forecasting that the eurozone is likely to experience an even deeper recession than it did after the 2008 financial crisis, regulators are looking safeguard the banks, to survive a potential rise in borrower defaults. As part of the coronavirus pandemic risk mitigation program, which provides ultra-low loans to lenders.
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