Now would be a crazy time for banks to resume dividends

Consider the dissonance between two bits of news from the banking world over the past week.

On Friday, Barclays’ share price jumped 7 per cent after it reported upbeat results for the third quarter of the year. A declining quarter-on-quarter trend in bad-debt provisioning plus a booming markets business equalled forecast-beating profits.

On Thursday, the Financial Conduct Authority had warned that 12m people in the UK now had “low financial resilience”, meaning they may struggle to pay household bills and service debts. The number jumped 20 per cent amid the Covid-19 crisis and the regulator said fresh second-wave lockdowns would cause “increased financial difficulty”.

Might there be an inherent contradiction here? Yes, Barclays has had a good quarter. Yes, between the start of July and the end of September, there was a decline in the alarming trend from the first half of the year of people and companies defaulting on their loans or being expected to.

But bankers’ claims that the worst is over ignores the reality of second-wave problems, and the deferred impact on the budgets of companies and individuals that has been cushioned by government aid. That helps in the short term but will not last for ever. The UK’s Office for Budget Responsibility reckons unemployment could more than triple to 13 per cent next year in a “downside scenario”.

All of this of course applies beyond Barclays, the first of the big UK banks to publish third-quarter numbers. It applies beyond the UK banks, too, inasmuch as most of the health patterns seen in Britain, and some of the economic aid, are replicated in similar fashion elsewhere in the world. Banks, as the arteries of economies, have been propped open by stents but at some point the support will have to be withdrawn.

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Bulls argue that bank share prices, especially in Europe, are so low that they cannot possibly go lower. Even in the US, where share prices have been more robust, the sector has been the standout underperformer as tech stocks and other darlings have boomed.

To spur a recovery, senior bankers in Europe have begun agitating for regulators to release them from constraints imposed early in the year over the payment of dividends. Appeals have been particularly vocal in the UK, notwithstanding the severity of the prospective UK economic hit from Covid-19 and the still looming disruption from Brexit. Over recent weeks, the chairmen of NatWest and Standard Chartered and the chief executives of Lloyds and Barclays have all spoken out.

HSBC has kept more of a low profile — ironically given how much of an article of faith dividends are for the bank and its investors. Once the highest yielding share in the FTSE 100, the bank has long seen a lock-step correlation between its share price and its dividend, reflecting the focus of many long-term shareholders, large swaths of them Hong Kong retail investors, on the bank’s traditionally generous payouts.

When the UK regulator stopped dividends, there was deep anger among those Hong Kong shareholders. A sell-off in the stock was compounded by nervousness about the bank’s broader outlook, given the political tightrope it is walking with operations in Hong Kong, mainland China and the UK at a time of heightened tensions between Beijing and the west.

Barclays’ results on Friday appear to have persuaded investors that the resumption of dividends for UK banks is just around the corner. Other UK lenders do not have the same scale of markets businesses, so may not benefit as much from renewed optimism. 

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But any similar decline in loan loss provisions, combined with boasts about “excess capital”, will add to the pressure on regulators to approve a resumption of dividends.

It is of course a double-bind: one argument for the banks preserving their capital so carefully is that, at these bombed-out share price levels, launching capital raisings would be prohibitively expensive and dilutive. Generous dividends, on the other hand, would woo investors and send up share prices. But they would also be a bet that the capital was not needed and that if required after all, a cash call would no longer be prohibitive thanks to a higher share price. Quite a punt.

It would be reckless in the extreme for any regulator in the midst of a global pandemic with unprecedented economic consequences to allow its banking system to deliberately deplete its capital — all the more so a British one still scarred by the mass bailouts of 2008.



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