- Capital strength gives PRA confidence to approve distributions
- Distributions with 2020 results face one of two tests
Large listed banks will be allowed to declare shareholder dividends alongside full-year and fourth-quarter results, after the Bank of England this week withdrew a nine-month ban on distributions.
Major lenders including Lloyds Banking Group (LLOY), NatWest (NWG), HSBC (HSBA) and Barclays (BARC) were asked to halt all declared or future distributions at the end of March, as the Covid-19 pandemic’s effects on the UK economy began to dawn on regulators.
The Prudential Regulation Authority (PRA), the central bank arm charged with overseeing financial institutions’ capital management, said that despite deep economic uncertainty and ongoing government support of the economy, the sector remained well capitalised.
A review of capital levels, conducted through two stress tests, found lenders should be resilient to economic scenarios that are “materially more severe than current central expectations”.
“The PRA judges that an extension of the exceptional and precautionary action taken in March is not necessary,” concluded the group in a statement on Thursday. “There is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework.”
However, investors hoping for a pay-out bonanza come February will be disappointed. The watchdog said that any distributions announced alongside full-year 2020 results must not exceed either 20 basis points of risk-weighted assets or 25 per cent of cumulative profits for 2019 and 2020 after deducting previously paid dividends.
Even on a headline basis, the caveats raise questions as to whether NatWest will be able to declare a dividend with its full-year results. In 2019, the state-backed lender paid out a 12p special alongside its 2p interim dividend, equivalent to almost the entire recorded and forecast net income for the eight quarters to December 2020 (see table).
| Bank | Share price (p) | RWA test (£bn) | Implied yield | Profits test (£bn) | Implied yield | Lower test |
| Barclays | 137 | 0.627 | 2.64% | 1.05 | 4.41% | 2.64% |
| HSBC | 402 | 1.310 | 1.60% | 0.72 | 0.89% | 0.89% |
| Lloyds | 35 | 0.415 | 1.67% | 0.70 | 2.82% | 1.67% |
| NatWest | 156 | 0.358 | 1.89% | 0.02 | 0.10% | 0.10% |
| Source: Investors Chronicle. Based on 2020 FactSet-compiled consensus net income and RWA forecasts, HSBC converted to £. | ||||||
The PRA’s definition of ‘cumulative profits’ – net income less AT1 coupons, preference share dividends and non-controlling interests, plus one-off goodwill impairments – could also complicate HSBC’s attempt to announce a payment with fourth-quarter results. In the nine months to September, the Hong Kong-focused bank made goodwill impairments totalling $1.4bn goodwill impairment – which could be enough to wipe out the bank’s profits, if these were determined to be a “one-off”.
Third-quarter results for the UK’s largest listed lender by assets gave the impression of a boardroom eager to return to the dividend list. HSBC said it would “consider whether to pay a conservative dividend for 2020”, subject to regulatory consultation.
Setting up potential further tense exchanges between boardrooms and the watchdog in early 2021, the PRA said it will “take into account any items of an exceptional or technical nature whose inclusion or exclusion materially flatters a bank’s 2020 Q4 performance”.
As 2021 progresses, the PRA plans to return to its standard approach to dividends and capital setting, under which responsibility for dividends are left in the hands of bank boards, subject to stress tests.
Earlier this month, Paragon Banking Group (PAG) became the first domestic UK lender to re-commence dividend payments since the March ban. Chief executive Nigel Terrington said the decision was taken unilaterally, though the FTSE 250 group had forewarned the Bank of England.
