Anyone familiar with “Ten Green Bottles” — a song celebrating the sequential destruction of cheap glassware — suspected British regulators would tell banks to suspend dividends. After all, the European Central Bank last week decreed that eurozone lenders should withhold payouts. The UK’s Prudential Regulation Authority required banks and insurers to follow suit on Wednesday. Drooping share prices slumped further.
The PRA has good reason for making its demand. UK banks were woefully unprepared for the global financial crisis. Losses on unsecured loans jumped to 7 per cent — the most since 1990. The bailout cost taxpayers billions.
The PRA has since rehearsed worst-case scenarios. The last balance sheet stress test was in December. Every bank passed, withholding pretend dividends and buybacks.
Now life imitates art. Real-world dividend suspensions will bolster capital buffers, though not hugely. UK banks could save about a percentage point in common equity tier one capital if no more dividends are paid this year, thinks Gary Greenwood at Shore Capital.
That helps a wider plan to conserve capital. So did the relaxation of a countercyclical buffer on March 11. This released about 2 percentage points of CET1 capital, which for most banks hovers in the low teens as a percentage of risk-weighted assets.
Simply pulling the final 2019 dividend will save about 40 basis points of capital for Barclays — money that could support customers. The bank’s share price to tangible net asset value of 0.33 times anticipates some dilutive equity issuance. This probably will not occur.
The outlier is HSBC, a UK-listed bank forced to follow the PRA’s diktat despite its focus on Asia. Lenders based in China and Hong Kong are hardly strangers to state intervention, however.
Investors who say banks are shelving payouts for solely political reasons, may be underestimating the duration and impact of the pandemic. If they are right, they will get the money later, anyway. Over in the US, where banks have so far stuck to paying dividends, another green bottle is teetering on a wall.
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