UK banks scrap dividends; bonuses also under Covid-19 pressure

London

BRITAIN'S top banks have axed dividend payments after pressure from the regulator, saving their capital as a buffer against expected losses from the economic fallout from the novel coronavirus.

Barclays, HSBC, Lloyds Banking Group , Royal Bank of Scotland, Standard Chartered and the British arm of Spain's Santander all halted payouts in a coordinated industry response to a request from the Prudential Regulatory Authority (PRA) on Tuesday.

The lenders had been due to pay out over £8 billion (S$14 billion) between them in 2019 dividends, with HSBC the biggest payer at US$4.2 billion.

The PRA also asked banks and insurers not to pay senior staff bonuses this year, although none of the banks opted to provide details on how they would comply with this second request.

The British lenders also held off announcing changes to their executive pay policies.

Shares in domestic-focused lenders Lloyds and Barclays shed more than 5 per cent each in early trading, while HSBC and Standard Chartered saw their stocks fall 7.7 per cent and 6 per cent respectively by 0708 GMT.

In Hong Kong, HSBC's shares plunged 9.51 per cent to HK$40 while Standard Chartered fell 7.64 per cent to HK$39.90 on the Hang Seng Index.

The PRA said banks entered the pandemic, which has put Britain into lockdown, with strong capital positions, enough to withstand a severe UK and global recession.

Banks pay out dividends as a means of rewarding shareholders and disposing of excess profits, but they have the option to retain the earnings instead to preserve their capital levels.

While suspending investor distributions was described as prudent by the lenders, analysts at Jefferies said the move had "structurally bearish ramifications" for the sector, including raising the cost of equity.

The statements from British lenders come after the European Central Bank (ECB) last week asked euro zone lenders to skip dividend payments and share buybacks until October at the earliest, and use their profits to support the economy.

Several of Europe's largest lenders, including UniCredit , and Societe Generale, have already announced they will hold off paying 2019 dividends for now.

However, there are some hold outs. Swiss banking giants UBS and Credit Suisse have both said they plan to press ahead with 2019 dividends despite their home regulator urging caution over payouts.

The move to scrap 2019 shareholder distributions is expected to free up capital that banks can instead lend to businesses and consumers rocked by the novel coronavirus pandemic.

But some analysts believe that cancelling dividends could actually harm the supply of credit to the real economy.

"We note that euro area bank market capitalisation fell on March 30 by the same as the 30 billion euros (S$47 billion) 'saved' by its dividend ban on Friday March 27," analysts at Bank of America Merrill Lynch said in a note, referring to the ECB's move.

The European Union's banking watchdog said earlier on Tuesday that banks should be "conservative" in how they award bonuses to preserve capital and keep lending during the novel coronavirus pandemic. However it stopped short of calling on banks to stop bonuses altogether.

Italy's UniCredit and Spain's BBVA have both said this week that their top management will waive their 2020 bonuses.

Standard Chartered signalled in a memo on Monday that the bank would likely cut its 2020 executive payouts.

PRA chief executive Sam Woods also wrote to heads of insurers, saying that they should pay "close attention" to the need to protect policyholders and maintain safety and soundness when considering bonuses or dividends.

HSBC signalled a gloomy first-quarter earnings season for British banks, warning in its statement that it would see bad loans rising and revenues falling as the economic impact of the pandemic hits. REUTERS, AFP

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