British banks cancel dividends: what does it mean?

Banks in the UK are cancelling their standard payments to shareholders - known as dividends - and are considering scrapping bonuses too, following advice by the Bank of England (BoE).

The BoE urged the move to ensure such institutions were as cushioned as they could be against the financial storm the coronavirus pandemic is likely to cause, and will be able to support lending in an economy hit by the lockdown.

Lloyds, RBS, Barclays, HSBC, Standard Chartered and the British arm of Santander all said they would cancel their dividends for 2019, which would have totalled roughly £7.5bn, and would also avoid share buybacks in the foreseeable future.

The move by the banks was not entirely voluntary, however. While the request from the Prudential Regulation Authority, the regulatory arm of the BoE, was not binding, it warned it was “ready to consider use of our supervisory powers” if they did not accede.

The authority also said it “expects” the banks to refrain from paying out bonuses to senior staff.

Since the 2008 financial crash, banks have been required to hold larger reserves as protection against sudden downturns, and as a result most insisted they would not need bailouts as a result of the Covid-19 pandemic.

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Nevertheless, the BBC points out, “banks were criticised during the financial crisis 12 years ago when they paid dividends months before needing the biggest bailouts in history.”

Barclays chairman Nigel Higgins said his bank had a “strong capital base”, but explained “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”.

The decision is not a harmless one. It “will prove unpopular with some investors, especially retail shareholders who rely on the payout for their income,” says the Financial Times.

Threadneedle Street also sent a warning to insurance companies, saying: “We expect them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from Covid-19.”

The BoE’s “announcement comes after it faced mounting pressure to follow in the footsteps of the European Central Bank, which last week urged lenders to stop dividend payments and share buybacks until at least 1 October,” says The Guardian.