HSBC, StanChart shares rally after BOE eases dividend ban

[LONDON] After nine months of restrictions, the Bank of England (BOE) offered UK banks a possible path to normality on Thursday when it said it was easing its de facto ban on dividends.

The move is a victory for HSBC Holdings, Standard Chartered and other large British lenders that scrapped dividends in March, when regulators said banks needed to conserve capital to cover losses from Covid-19. Banking executives had lobbied vocally for the return to payouts, including NatWest Group chairman Howard Davies, who said in July the sector isn't investible otherwise.

"This is a sensible decision from the regulator," John Cronin, an analyst at Goodbody, said. "It was important in the context of sustaining and stimulating investor interest in the sector."

Investors in Hong Kong who have long bought HSBC and Standard Chartered stocks for their dividend payouts welcomed the news. HSBC gained as much as 2.2 per cent while Standard Chartered rallied as much as 3.3 per cent as at 10.45am in Hong Kong.

The BOE approach - despite the caveats and caution of its statement - contrasts with developments in the European Union (EU), where watchdogs are leaning towards extending their own de facto dividend ban well into next year, though with some exceptions for the strongest lenders, according to people familiar with the matter.

Some EU regulators are concerned that if banks resume payouts, they may not be strong enough to resist another round of taxpayer bailouts if pandemic-related loan losses worsen.

The BOE's Prudential Regulation Authority (PRA) struck a different tone.

"An extension of the exceptional and precautionary action taken in March is not necessary," the PRA said. "There is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework."

The divergence, which comes as Britain prepares to leave the European Union's single market, underlines the different approaches regulators have struck even as they battle the economic effects of a global pandemic. In the US, the Federal Reserve allowed banks to continue to pay dividends even as they restricted lenders from increasing them above second-quarter levels, and banned share buybacks.

Thursday's announcement means Britain's banks will now be able to make some 2020 distributions. The guidance may give British lenders, whose shares have cratered since March, a boost even as the pandemic continues and Britain seems set for a messy Brexit.

Standard Chartered welcomed the move and said it would consider resuming shareholder returns on Feb 25, when it reports full-year earnings. Barclays and HSBC declined to comment on the changes. NatWest Group said it noted the announcement and said a decision on dividends would be taken at the year's end.

The PRA will subject boards to regulatory "guard rails" when setting their 2020 dividends, before returning to its normal approach during 2021. Payments should not exceed 20 basis points of risk-weighted assets at the end of 2020, or exceed 25 per cent of cumulative quarterly profits over 2019 and 2020 after deducting shareholder distributions, create excess vulnerabilities to stress or impede a bank's ability or willingness to support households and businesses.

The regulator also said banks should exercise a "high degree of caution and prudence" on cash bonuses for senior staff.

"The measures are in fact very restrictive - however, the message around the path to normalisation in 2021 is helpful," said Goodbody's Mr Cronin.

BLOOMBERG