H1 results season for banks will commence towards the end of July
The Bank of England has removed the restrictions on bank dividends and share buybacks which were instated as a result of the pandemic.
The central bank’s decision comes as it views the banking sector as robust enough to stomach any additional economic setbacks.
The Prudential Regulation Authority said in December that dividends could recommence following a nine-month ban, however it also added limitations on the payouts. Now, the restrictions have been lifted effective immediately.
The Bank of England’s ruling follows decisions by both the US Federal Reserve and the European Central Bank to remove limits placed on dividends in recent weeks.
In a stress test carried out by the Bank of England’s Financial Policy Committee, it found that banks could deal with losses of £70bn, in addition to £20bn they had to withstand in impairments during the pandemic.
“The relaxation of these restrictions is also an acknowledgement that the sector is in pretty solid financial shape and marks an interesting contrast with the European Central Bank which signalled caution on a quick return to big dividends in the Eurozone,” said Danny Hewson, financial analyst at AJ Bell.
“Prior to the 2007/8 financial crisis banks were seen as stolid and reliable dividend payers and were doing their best to reclaim this mantle when Covid hit.”
“Today’s news may feed expectations that the likes of Lloyds, Barclays and NatWest can emulate the recent actions of their American cousins and sanction super-sized shareholder returns by releasing excess capital build up through the course of the coronavirus crisis,” Hewson added.
“Some protections are being kept in place to ensure banks still have extra capital put by just in case and, in order not to make regulators twitchy, the sector may be wary of going too far, too fast on capital returns.”
It will become clear very soon just how generous UK banks are prepared to be, with H1 results season commencing towards the end of July. The guardrails may have been removed, but the Bank of England will be expecting companies to act responsibly.
Shares in the major UK banks, such as Barclays, NatWest, HSBC and Lloyds have risen since the announcement, while the FTSE 350 banking index is up by 0.59% since this morning’s opening.