British banks might be able to afford to pay dividends in 2021 but in the wake of regulatory easing and massive support from the Bank of England such payouts could prove politically fraught, say analysts.
The BoE has begun an assessment on whether to extend the suspension on payouts such as dividends and share buybacks beyond the end of 2020.
In March, the leading banks in the U.K. said they would cancel their dividends for 2019 and refrain from setting cash aside for this year. The lenders said they had made their move after a formal request from the BoE, which stopped just short of ordering them to do so, and that the decision would allow them to "serve the needs of businesses and households" during the pandemic. Share buybacks and cash bonuses to senior staff were also suspended.
The move was criticized, with NatWest Group PLC Chairman Howard Davies saying the move made banks "uninvestible." He recently told The Mail on Sunday the bank could distribute dividends "at some level" should regulators permit it.
Investec analyst Ian Gordon believes most of the major banks are in a position to pay out and should do so. His assumption is that the suspension on dividends and share buybacks will be lifted in time for a return to payouts in February 2021.
"It should be. After all most banks are carrying material excess capital relative to regulatory minima," Gordon said via email. Although Gordon said he did not expect a 2020 dividend from NatWest, he does think Lloyds Banking Group PLC, HSBC Holdings PLC and Standard Chartered PLC will pay out.
Dividends were suspended because of the extraordinary circumstances caused by the pandemic. The BoE made huge sums available to ease bank lending, slashed base rates to 0.1% and relaxed regulatory buffers, including the "rainy day" countercyclical buffer, which it cut to 0%.
That unprecedented level of support provided a significant cushion to bank asset quality. But as the crisis shows no sign of abating, S&P Global Ratings credit analyst John Wright said asset quality issues might resurface.
"Regulators have unwound countercyclical buffers which have helped capitalization, but at some point that will be reversed. If lower interest rate environments translate into lower profitability banks may find it harder [or be slower] to organically rebuild capital so regulators are likely to be cautious around letting banks pay dividends before they are sure 'the end is in sight' with the crisis and its economic impact," said Wright via email.
The key U.K. government job-support scheme through which the state has paid 80% of wages for those unable to work because of the pandemic, comes to an end this month to be replaced by a considerably less generous scheme. In such circumstances, the BoE will be reluctant to sanction a return to full payouts, said Goodbody analyst John Cronin.
"Our own view is that the BoE will be reluctant to give the 'all clear' to bank boards to pay out. We suspect a strongly worded statement to the effect that bank boards need to exercise significant caution in electing to commit to material dividend payments will be dovetailed with a 'behind closed doors' push to significantly constrain payouts," said Cronin in a note to investors.
"While we think the PRA will exert significant (potentially indirect) pressure on bank boards to limit payouts to token dividend payments — at best."
Banks raise stakes
Some senior bankers have made their views on the issue known in recent days.
"Being able to distribute excess capital is very important if the broader economy is going to have confidence in its financial system," Barclays PLC CEO Jes Staley told the Institute of International Finance online event.
Banco Santander SA Chairman Ana Botín added: "Going back to dividends is going to help the economy because it helps the flow of capital, it lowers the cost of equity, so I would like to put on that the table as something to be considered very seriously by global regulators."
Some European banks, similarly constrained to the U.K. banks by the European Central Bank, have already indicated they are prepared to resume dividend payments. At its third-quarter results, UBS Group AG said it had accrued $1 billion for cash dividends to be proposed at its 2021 annual general meeting. Swedbank AB (publ), despite facing investigations related to money laundering and booking higher credit impairments, said at its third-quarter results that it was considering whether to pay a dividend.
In addition to the pandemic, the U.K. is coming to the end of the transition period for it to properly leave the European Union, with no agreement on future arrangements between the two sides in sight
Wright cautioned that the timing of any return by banks to paying dividends would be difficult to judge.
"The government support is to support banks continuing to function for the benefit of society and the economy, i.e. provide credit, not to pay shareholders' dividends at the first available moment. There is clearly a conflict. Timing is key," he said.
After the financial crisis, demands for greater bank capitalization along with increased regulation constrained lenders from returning to dividend payouts on the same scale as before the crisis.
NatWest only returned to paying a dividend in 2018 — it is still 62% state-owned after being bailed out by taxpayers during the financial crisis when on the brink of collapse.
Lloyds, too, was taken into state control during the financial crisis, and though it has subsequently returned to the private sector, it paid out its first dividend since the crisis in 2015.
Barclays, with its diversified business model, has seen its investment banking arm thrive during the pandemic, with a 44% rise in income in the first quarter to £3.6 billion, and shareholders might have expected that to be reflected in any dividend.
All British banks have seen their share prices hit by the uncertainty of Brexit affecting total shareholder returns. HSBC and StanChart have also suffered through fears over the U.S.-China trade war affecting their operations in Hong Kong and Asia.
HSBC has paid out the same dividend for the past four years and its failure to do so this year caused considerable unrest among its retail investors in Hong Kong, who hold about a third of its shares and rely on the dividends for income.
Total shareholder returns so far in 2020 have not been hit as badly as 2011, when fears over the eurozone debt crisis combined with payouts for misselling payment protection insurance affected bank stocks.