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Return journey

11 December 2020 By Liam Proud

Medieval Catholics could buy their way out of purgatory. No such luck for HSBC, Lloyds Banking Group, Barclays, NatWest and Standard Chartered. Though the Bank of England will let the lenders pay dividends and buy back shares again next year, the permitted return looks low compared to pre-pandemic levels. It effectively strands banks in investment no man’s land.

The five lenders lost 4% of their collective 167 billion pound market value on Friday morning, following the BoE’s announcement that it would relax a ban on returning cash to shareholders. Big banks are well-capitalised enough to withstand a much bigger-than-expected coronavirus hit, the supervisor said, meaning restrictions implemented in March are no longer necessary.

Yet chairmen like HSBC’s Mark Tucker and Robin Budenberg at Lloyds will hardly have a free hand to distribute spare capital. The BoE is erecting two “guardrails” to enforce prudence over payouts from 2020 earnings, which would begin next year. Banks can only pay the higher of 0.2% of risk-weighted assets at the end of the year, or 25% of cumulative earnings for 2019 and 2020 – adjusted for dividends, buybacks and goodwill impairments. That translates into a meagre average yield of around 2% for the five lenders, according to Breakingviews calculations based on Citigroup and Jefferies data.

Investors in HSBC and Lloyds have grown used to dividend yields more than double that level in the past five years, according to Refinitiv. NatWest is probably the worst-affected: the state-controlled bank’s sky-high common equity Tier 1 ratio of 17.2%, excluding temporary regulatory relief, had raised hopes for much bigger buybacks in 2021. And even though the guardrails may allow Barclays and Standard Chartered to distribute more capital as a proportion of their market value, their shares were still trading at roughly half expected tangible book value for this year on Friday morning. The BoE’s intervention may have permanently raised the cost of equity that investors attach to the sector.

It’s not the central bank’s job to placate shareholders. Nevertheless, the negative reaction on Friday raises the question why it bothered to relax the restrictions. The supervisor has ditched its hawkish position, but not by enough to tempt investors back to the sector. The new halfway house will please nobody.


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