- Industry regulators might allow banks to recommence shareholder returns from next year provided their loss-absorbing capital buffer remains intact
- Adequate capital against risk weighted assets and increased lending has been made pre-requisites of resuming dividend payments
- HSBC intends to make dividend payments for 2020 provided the economic situation improves in early 2021
Banks in the UK could start paying dividends again from next year onwards as they are expected to receive a go-ahead by the industry regulators. During the peak of unprecedented crisis in March, the Prudential Regulation Authority (PRA), an arm of BoE, ordered the biggest lenders to cancel outstanding dividends for 2019 and to suspend further shareholder pay-outs until the end of the year.
Industry regulators might allow banks to recommence shareholder returns from the next year, provided their loss-absorbing capital buffer remains intact, and they continue to support the economy by boosting credit flow in the real economy. Under the terms being considered between the banks and the Bank of England, the flow of credit must continue to rise while keeping capital adequacy requirements in check. To put it simply, if banks are in good health, they can resume dividend payments.
The flow of credit is essential in the economy irrespective of the phase it is going through. With the number of coronavirus infections rising across the globe, the UK’s economy is expected to shrink further. The banks have to find a delicate balance between maintaining sufficient capital headroom and capacity to raise funds through equity. Despite the economic slump and a large amount of provisioning made by the banks, the capital ratios of the banks have improved. So far, no decision has been made, and the pros and cons of allowing dividends versus banning dividends is being considered.
During the heightened crisis, even the blue-chip companies slashed or cancelled their dividend pay-outs. The Financial Conduct Authority had asked the businesses to even delay the release of their results in the wake of the coronavirus crisis. A majority of investors look forward to investing in banking stocks for dividend income. Banking stocks not paying dividends seem to become unattractive for a significant amount of population.
Banks and other financial institutions have been up and running throughout the turbulent period and have played an important role to support the economy by facilitating state-backed loans. However, they have been facing huge risks of impairment, the transition to a newer interest rate regime (LIBOR to SONIA). Recently, the Bank of England has also asked banks to prepare for negative interest rates in the economy.
While the banks are considering pushing the flow of credit in the economy, they are also looking to hike charges on credit taken. UK lenders have increased the cost of consumer loans in the Q3 and the trend is likely to follow in Q4, according to a recent survey by BoE. Credit products such as credit cards and consumer loans, the interest rates have been hiked in recent months.
Let’s analyse some FTSE 100 listed lenders to learn about their capital position.
Barclays Plc (LON: BARC)
UK’s prominent lender Barclays remains well capitalised and is confident of its capital generation abilities in the future. The FTSE 100 listed bank acknowledges the importance of maintaining a healthy common equity tier 1 (CET1) ratio against its risk weighted assets (RWA). During the Q3, Barclays CET1 ratio stood at 300 basis points above their own regulatory minimum; increasing by 40 basis points in the quarter to 14.6 per cent. Notably, Barclays had suspended its final dividend payment of 2019 in April following BoE guidelines. Barclays is expected to provide an update on dividend payments at FY20 results as it thoroughly understands the importance of capital returns to shareholders.
On 27 October, Barclays shares traded at GBX 110.98 at 8:24 AM GMT +1, marginally up by 0.42 per cent from the previous day’s close. On a YTD basis, Barclays shares were down by more than 40 per cent.
HSBC Holdings Plc (LON: HSBA)
The UK-based lender has been caught between the US and China row and made the headlines recently. During the Q3, the CET1 ratio was marginally up by 0.6 per cent to 15.6 per cent from the Q2 2020 due to a decrease in its RWA. Despite the economic fallout and lower interest rate environment, the lender managed to lower its credit losses and strengthened its capital and liquidity ratios during the third quarter.
The lender intends to resume dividend payments provided the economic situation improves in early 2021 along with required regulatory approvals.
On 27 October, HSBC shares traded at GBX 336.50 at 8:23 AM GMT +1, up by 5.37 per cent from the previous day’s close. On a YTD basis, HSBC shares were down by more than 46 per cent.
The UK is going through an economic recession. A financial system collapse could end up being the final nail in the coffin. To protect the health of the financial sector, BoE has imposed a dividend ban on banks as they have made huge provisions against the state-backed loans. For dividend seeking investors, these stocks suddenly become unattractive, which was not the case before. UK lenders are negotiating with the apex authority to remove the ban on dividend payments. However, adequate capital against RWA’s and increased lending are pre-requisites of resuming dividend payments.