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Lloyds and its banking rivals have plenty of capital but will dividends return soon?


With third-quarter results in from four of the five FTSE 100 banks, it’s fairly clear banks are keen to pay dividends.

The sector’s capital reserves contain much more than is required by the regulator, with current headroom at roughly £200bn.

However, since March, the Bank of England has held the banks back from making dividend and bonus payments, to ensure balance sheets are strong enough to withstand whatever the coronavirus pandemic could bring.

But, in their third-quarter results over the past week Britain’s big lenders have slashed their level of new provisions for bad debts, indicating the sector is confident it has enough of a buffer to cope with the worst of the pandemic’s effects.

On Thursday, Lloyds Banking Group PLC (LON:LLOY) revealed it had strengthened its capital reserves, with a Common Equity Tier-1 ratio of 15.2%.

This is above the 15% level at which ended last year and paid out a final dividend of 2.25p per share, totalling £1.6bn.

Looking back on last year’s finals, when Lloyds’ CET1 ratio fell to 13.8% after dividends, directors said for this year they were targeting an ongoing CET1 capital ratio of circa 12.5% plus a management buffer of circa 1%, so 13.5%.

Also today, Standard Chartered PLC (LON:STAN) reported a capital ratio of 14.4%, while earliet in the week HSBC PLC (LON:HSBA) unveiled a ratio of 15.6%, while at Barclays PLC (LON:BARC) last week it was 14.6%, still more than 300 basis points above regulatory requirements.

NatWest Group PLC (LON:NWG) reports on Friday and it would be highly surprising if it is an outlier.

Under pressure from this increasingly confident sector, the BoE’s Prudential Regulatory Authority is reportedly ready to allow shareholder payments to resume as long as banks maintain their financial strength and continue to support business struggling due to the pandemic.

A decision from the regulator is expected by Christmas, Barclays and others have said.

Lenders will need to agree on a new floor for their capital ratios and commit to increase net lending.

With the PRA ban effectively having prevented around £8bn of cash being paid to shareholders earlier in the year when the economy was going into lockdown, plus pre-pandemic forecasts having estimated the sector would pay out nearly £14bn in dividends on their 2020 earnings, many shareholders will be rubbing their hands with glee – especially with bank shares scraping multi-year lows.

Alex Brazier, executive director for financial stability, told a conference this week: “It does require a degree of patience from investors.”

And analysts at UBS said that it was questionable whether bank’s levels of capital are quite as excessive as they seem “in a market in which Brexit, COVID-19 and regulatory uncertainty are so pronounced”.

Indeed, Tom Sieber, markets analyst at AJ Bell, says investors should not get their expectations too high.

“If you consider that before the crisis the banks were already trading on dividend yields close to double-digits and share prices have fallen heavily since, then expecting dividends to return to their former levels in the near-term seems highly unlikely,” Sieber said.

“It would certainly run counter to what the market is pricing in.”

Analysts at Numis believe the PRA has a tricky decision but believes restrictions will be lifted, which will result in an immediate rerating for the sector, even though they think banks will only begin with a small payout.

“On balance, and assuming some form of Brexit deal, we think the ban will be lifted.

“Banks’ immediate response (likely token) will then be of secondary importance. The ability to pay anything should drive share prices higher.”

But the analysts said investors needed to recognise that UK capital requirements are set on the assumption that dividends are turned off well before a breach of MDA, maximum distributable amount, which requires regulators to automatically restrict earnings distribution if a bank’s total capital falls below the sum of its buffer requirements.

“Restrictions could therefore return,” they added, though their forecasts do not suggest this will happen.

Either way, once shareholder distributions are switched back on, “it will be hard to ignore the yield based valuations of the UK banks sector”, Numis said.

Small Cap Wrap – Amryt Pharma

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