To many investors, the Bank of England’s recent call for the UK’s largest lenders to suspend dividend payments is nothing less than an outrage.
By the regulator’s own admission, big banks entered this crisis with resilient balance sheets, and the funds to pay distributions. That confidence has been superseded by concerns over the national interest. “We do not expect the capital preserved to be needed by the banks in order to maintain adequate capital positions,” the Prudential Regulation Authority explained, “but the extra headroom should help the banks support the economy through 2020.”
For shareholders in HSBC (HSBA) and Standard Chartered (STAN), both of which derive most of their income from abroad, the request seems especially harsh.
In any case, it is worth considering the Bank of England's (BoE) move in the context of the speed and force with which the coronavirus has already arrived. A month ago, banks and their investors were factoring in the prospect of an economic recession. Now, the Centre for Economics and Business Research predicts UK gross domestic product will contract by 15 per cent in the second quarter, before bouncing back in the second half of the year to finish 4 per cent down in 2020.
This is the sort of scenario that large capital buffers were only just about built for, as the BoE’s most recent stress test of the banking system shows. Taxpayer-owned Royal Bank of Scotland (RBS) was right to highlight its pro-forma common equity tier one (CET1) capital of 16.9 per cent after its dividend cut, but it is increasingly hard to say how badly this might be affected by loan impairments, suspended interest income and a mortgage market suddenly on ice.
For Barclays (BARC), the sector’s last champion of investment banking, there is the added question of how to account for so-called level 3 assets, which are hard to value even when markets and economies are calm. According to analysts at Berenberg, these assets make up a third of Barclays’ CET1 capital, although their high historic turnover suggests the bank can trade in and out of them with greater ease than some European peers.
All of this is before the punishing effects of a base rate that now sits at 0.1 per cent, while the mere mention of Brexit negotiations at this point seems positively quaint – even though the issue dictated sentiment toward the sector until the start of this year. If somehow the UK economy begins to rebound later this year, the sector’s hopes for better returns on equity look ever more illusory.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
