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Banks forced to axe dividends and may cut bonuses over COVID-19 crisis

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Photo montage: Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland. (AFP via Getty Images)

Shares in UK banks dropped sharply on Wednesday 1 April, after the UK’s biggest lenders gave in to pressure from regulators to scrap their dividends for the year.

HSBC (HSBA.L), Lloyds (LLOY.L), Barclays (BARC.L), Royal Bank of Scotland (RBS.L), Santander, and Standard Chartered (STAN.L) released separate statements on Wednesday saying they would cancel any outstanding dividend payments. The banks also ruled out any other payouts for the remainder of 2020 and axed share buybacks.

In total, the announcements mean around £7.6bn of dividends been axed by banks, according to stockbroker AJ Bell’s investment director Russ Mould.

Several of the announcements from banks referenced formal requests from the Bank of England and the Prudential Regulation Authority (PRA), a division of the central bank that oversees lenders.

Sam Woods, the head of the PRA, held discussions with the chief executives of Britain’s biggest lenders in recent days and wrote them a series of letters on Tuesday urging them to scrap dividends and share buybacks.

Woods said in a statement it was a “sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption.”

The regulator is also pressuring banks to axe or reduce bankers’ bonuses this year, as a result of the ongoing coronavirus pandemic.

“The PRA also expects banks not to pay any cash bonuses to senior staff, including all material risk takers, and is confident that bank boards are already considering and will take any appropriate further actions,” Woods said in a statement.

Sam Woods, deputy governor for Prudential Regulation and CEO of the Prudential Regulation Authority. (Jonathan Brady/PA via Getty)

The dividend suspensions sent bank stocks crashing. Barclays fell by 4.9%, Royal Bank of Scotland dropped by 5.2%, and Lloyds fell 5.8%.

“These are difficult decisions, not least in terms of the immediate impact they will have on shareholders,” Barclays chairman Nigel Higgins said in a statement.

“The bank has a strong capital base, but we think it is right and prudent, for the many businesses and people that we support, to take these steps now, and ensure that Barclays is well placed to continue doing what we can to help through this crisis.”

RBS chief executive Alison Rose said: “Helping people, families and businesses who need our support is the right thing to do at this time of significant uncertainty.

"The Board remains committed to capital returns, will continue to review the situation and will look to resume distributions to ordinary shareholders in due course."

Asian-focused banks suffered the steepest share price drops. Standard Chartered, which is listed in London but has operations focused in Asia, dropped 7%. HSBC shares fell 9.1%, underperforming peers as it warned alongside its dividend announcement that revenues would be lower and credit losses higher due to the COVID-19 pandemic.

The sell-off contributed to a sharp slump in the FTSE 100.

Pressure from the Bank of England follows a similar call from the European Central Bank (ECB) to eurozone lenders last week, urging them to suspend dividends and share buybacks until at least October.

Micheal Hewson, chief market analyst at CMC Markets, said: “While this is likely to be disappointing for shareholders it is an entirely sensible course of action for a sector that still has a PR problem 12 years on from the financial crisis, and which will be expected to do some heavy lifting for UK businesses over the course of the next 12 months.”

However, Bank of America analysts Rohith Chandra-Rajan and Alastair Ryan wrote in a note to clients: “This may play well in the media but we worry that the move undermines confidence in the regulatory framework and raises cost of capital.”

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