Barclays, Lloyds and NatWest are set to pump out more than £22 billion in dividends or share buybacks over the next two years after the Bank of England removed Covid caps on shareholder payouts today.
The Bank installed curbs on payouts at the start of the pandemic to ensure banks had enough capital to get through a catastrophic credit crisis.
In the event, no such crisis has occurred, and the dwindling risk has led to the decision to allow shareholder payments to return, triggering a windfall for Britain’s pensions.
Traditionally, pensioners have relied on bank dividends to provide their retirement income.
“Extraordinary guard rails on shareholder distributions are no longer necessary,” the Bank said in its latest financial stability report.
Analysts including those at broker Jefferies said the move meant Barclays, Lloyds and NatWest could now pay around 30% of their stock market valuation back to shareholders by the end of 2023 and still be within the central bank’s capital guidelines.
The Bank had signalled it could ease the restrictions in December but shares in the banking sector jumped today as analysts did the maths. NatWest and Lloyds jumped 2% and Barclays 1%. Even HSBC, which relies on Asia for most of its profits, gained 1%.
The news from the Bank was the latest fillip for banking stocks which have risen sharply of late amid hopes of strong profit growth in the forthcoming season for reporting their financial results for the first half of the year.
Many in the City felt the Bank’s guardrails were never necessary in the first place, given that UK banks have some of the biggest buffers against losses in the world already.
Ian Gordon, banking analyst at Investec bank, who has always said the curbs were “an absurdity”, said: “Given the sheer scale of surplus capital across the UK banking sector and, in our view, relatively limited near-term opportunities for sensible capital deployment, we now expect the removal of regulatory shackles to unleash a bonanza of normalised dividends and share buybacks.”
He predicted Lloyds would lead the way.
Banks may decide not to pass on all the funds they can now access. They could use some of it to boost their lending. HSBC is already making a big push into mortgages amid buoyant market conditions.
However, analysts pointed out that personal unsecured and corporate lending could remain muted during the economy’s recovery from the Covid lockdowns.
Bank governor Andrew Bailey insisted the dividend caps were necessary. “A year ago we were in an unprecedented situation. I think it’s very important not to apply judgment of hindsight,” he said.
The Bank also today left its “countercyclical capital buffer” — a cushion of capital that banks need to hold against lending, at zero per cent to encourage them to lend more.