In response to a request from the Prudential Regulation Authority (PRA) the UK’s seven largest banks are to suspend £15bn of dividend payments to shareholders and halt buybacks on ordinary shares until the end of 2020, and will also cancel payments of any outstanding 2019 dividends
The PRA wrote to HSBC, Nationwide, Santander, Standard Chartered, Barclays, RBS and Lloyds asking them to agree to publish a statement it had drafted.
This read: ‘In order to help us to serve the needs of businesses and households through the extraordinary challenges presented by Covid-19, the board has decided that until the end of 2020 we will undertake no quarterly or interim dividend payments, accrual of dividends, or share buybacks on ordinary shares.
‘In addition, in response to a request from the PRA and to preserve additional capital for use in serving our clients, the board has agreed to cancel payment of any outstanding 2019 dividend. Our board will decide on any dividend policy and amounts at year-end 2020.’
The regulator describes the move as ‘a sensible precautionary step’, given ‘the unique role that banks need to play in supporting the wider economy through a period of economic disruption, alongside the extraordinary measures being taken by the authorities.’
It says it does not expect the capital preserved to be needed by the banks in order to maintain adequate capital positions, but argues the extra headroom should help the banks support the economy through 2020.
The PRA also expects banks not to pay any cash bonuses to senior staff, including all material risk takers, and says it is confident that bank boards are already considering and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months.
The regulator said that recent stress tests confirm its view that the banks enter this period with strong capital positions, more than sufficient to accommodate the combined simultaneous impact of severe UK and global recessions and a financial markets shock.
Nigel Higgins, chairman of Barclays which was set to pay out over £1bn in dividends on Friday, said: ‘These are difficult decisions, not least in terms of the immediate impact they will have on shareholders.
‘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.’
Sam Woods, PRA CEO, has also written to UK insurers, about distribution of profits and urging them to maintain ‘safety and soundness’ when considering any distributions to shareholders or making decisions on variable remuneration.
The letter stated: ‘Through their provision of both general and life insurance products, insurers provide an essential safety net for individuals and businesses. They also have an important role as long-term investors in the UK economy.
‘In the current situation of high uncertainty, it is therefore critical that insurers manage their financial resources prudently in order both to ensure that they are able to meet the commitments they have made to policyholders in a way that is consistent with the expectations of the Financial Conduct Authority, and to enable them to continue to invest in the economy.’
FTSE 350 companies started taking action to suspend divividend payments last week with £35bn wiped off dividend payments.
- £3.5bn of dividends slashed off FTSE 100 [26 Mar 2020]
Last week, the European Central Bank (ECB) updated its recommendation to banks on dividend distributions, stating banks should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020, in order to boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus (COVID-19) pandemic.
It estimated this would keep an additional €30bn (£26bn) of capital in the financial system Banks should also refrain from share buy-backs aimed at remunerating shareholders.
By Pat Sweet