Banks in the UK are braced for the country’s top financial supervisor to put a stop to £7.5bn of dividend payments due over the next few weeks in a move designed to shore up capital levels during the coronavirus outbreak.
The Prudential Regulation Authority, the supervisory arm of the Bank of England, is running out of time to make a decision on whether to block the payments, with Barclays due to pay a full-year dividend of 6p per share on Friday.
UK lenders, including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland, are expecting the PRA to advise against the payments within the next few days, according to several people briefed on their plans.
“We think the regulator will probably announce something soon,” said one.
Until last week, the PRA had been relatively unfazed by dividend payments going ahead as planned, according to one person briefed on discussions between the banks and the regulator. But the supervisor changed its stance on Friday, when the European Central Bank ordered eurozone banks to freeze dividend payments and share buybacks, they added.
The ECB’s decision had put “extraordinary pressure” on the PRA, the person said.
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After the ECB’s move, “we are expecting a similar recommendation from the BoE regarding banking sector dividends and buybacks” by the end of Tuesday, said Eoin Walsh, a portfolio manager at TwentyFour Asset Management, which invests in bank debt instruments.
“The BoE has been the quickest and most decisive of the central banks in dealing with the economic impact of the coronavirus thus far.”
Another person briefed on the talks between regulators and banks said companies “have to think carefully about dividends, buybacks and, to be frank, bonuses”.
“Whether there needs to be an element of compulsion on firms from the PRA, or whether individual firms make the right choices in collaboration with their shareholders and bondholders remains to be seen.”
The person added that the steep share price falls at banks including Lloyds and Barclays showed the market expected a “huge uptick in impairments and stress”. “If you believe those indications that the future could be as bad as the stock price dive, I would not want to be the bank CEO paying a dividend in this environment.”
One bank executive said their institution had considered unilaterally withholding its dividend, but had concluded it would be easier to handle negative investor reaction if they were forced to act by the regulator.
Executives at HSBC discussed over the weekend whether they should withhold the dividend and if there was a “first-mover advantage” to announcing its decision before the other banks, according to one person briefed on the talks.
The Asia-focused lender earned plaudits last year when it was the first to lower pension payouts for executives, forcing all other UK banks to follow.
However, HSBC had decided for now that it would be best to wait for the regulator to make a determination, the person added.
One uncertainty is how prescriptive the PRA will be when it makes an announcement, said one of the people briefed on the talks. It could invite banks to reconsider the payments, the equivalent of a “raised eyebrow and a nod”, rather than forbidding them outright, as the ECB has done.
Withholding the dividend would be particularly tricky for Lloyds, which has a large retail shareholder base, and for HSBC in Hong Kong, where many retail investors see the payment as a reliable component of their income.
Barclays, Lloyds, RBS and HSBC declined to comment, as did the PRA.
Additional reporting by Matthew Vincent and Nicholas Megaw in London
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