UK banks now able to improve shareholder pay out

The Bank of England (BOE) has announced that it is removing restrictions imposed at the height of the pandemic to make sure banks could weather deep losses.

As a result of the restrictions being removed, Britain’s biggest banks will be able to increase dividend payout. The announcement was made today by the BOE, which disclosed that it is fully removing guardrails that limited dividends this year at HSBC Holdings Plc., Barclays Plc., Standard Chartered Plc. and other top lenders.

The BOE made the move after concluding that the industry now has enough capital to resume payments as they wish. The move comes a day after the European Central Bank signaled its caution over a quick return to dividends.

Slowly lifting restrictions from last December

The BOE began to relax its de facto ban on dividends in December, but kept a cap of about 25 per cent of quarterly profit and said 2021 dividends could be accrued but not yet paid. In a statement, the BOE’s Prudential Regulation Authority (PRA) announced that, “the limits in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect”.

The rollout of vaccinations in the UK and results of interim stress tests by the English Central Bank has bolstered the PRA’s view that banks could return to a standard approach to capital-setting and shareholder distributions.

The PRA is encouraging banks to “continue to exercise an appropriate degree of caution around the level of any shareholder distributions,” noting that, “it is essential that banks continue to support households and businesses through the economic recovery and as the government’s support measures unwind over the coming months”.

The PRA statement came as the BOE released its latest health check on the UK financial system, known as the Financial Stability Report.

Initial rise in bank shares upon news of restrictions being lifted

Bloomberg reports that shares in British banks initially rose after the announcement, before paring some gains. NatWest Group Plc. was trading 0.7 per cent lower at 1:36 p.m. in London, while Lloyds Banking Group Plc. was 0.7 per cent higher. HSBC was up 0.6 per cent, Barclays rose 0.1 per cent and Standard Chartered was up 0.2 per cent.

The BOE’s move compares to a more cautious approach by the European Central Bank, which has capped payouts through September while also extending relief from bank leverage restrictions to help firms continue lending. However, Governor Andrew Bailey told reporters that the measure is not a free for all at this point, by any means.

The BOE is recommending that open-ended funds are better designed to prevent a rush for withdrawals during periods of market stress such as the early stages of the pandemic. The central bank wants a more granular classification of the assets in each fund so it is clearer how long it would take sell them to meet redemption requests.

The bank said it also wants a better swing price mechanism and longer redemption periods to deter investors from yanking their funds when markets are in turmoil. In the meantime, the U.S. Federal Reserve has relaxed restrictions in a sign that authorities are more optimistic about the industry’s ability to manage borrower defaults while also rewarding shareholders.

While COVID-19 ravaged the economy and stoked the UK’s worst recession in 300 years, emergency steps by the government and industry have kept loan losses so far well below worst estimates. Still, authorities have warned that defaults could increase once temporary help such as payment holidays expire.

Britons still remain vulnerable to financial distress

While the UK economy is rebounding from 16 months of lockdowns, the BOE has flagged that millions of Britons remain vulnerable to financial distress. Businesses, meanwhile, have accrued almost £80 billion (US$111 billion) of emergency loans, backed by the government, to keep them afloat during the pandemic.

Most of England’s remaining limits on socialising are due to be lifted on July 19 and the furlough programme will stop in September, having supported 30 per cent of the UK workforce at its peak last year.