BoE lifts Covid restrictions on banks’ shareholder payouts

UK banking sector ‘remains resilient’ despite continued uncertainty, say officials

Last modified on Tue 13 Jul 2021 03.45 EDT

The Bank of England has lifted all Covid restrictions on dividends at the UK’s largest lenders, paving the way for a boom in payouts even as the pandemic continues.

Officials said banks were strong enough to weather the remainder of the Covid pandemic, and that interim results from the upcoming stress tests – due in December – showed the banking sector “remains resilient” despite continued uncertainty. “Extraordinary guardrails on shareholder distributions are no longer necessary,” the financial policy committee said.

The announcement will be welcomed by shareholders, who have had their payouts curbed for 16 months.

The regulator forced lenders to scrap roughly £8bn worth of dividends as well as share buybacks in March 2020 in the hope of giving banks an additional cushion to weather an economic downturn sparked by the Covid crisis.

The Bank of England later allowed limited payments to resume at the start of 2021. The interim cap was meant to give regulators an opportunity to monitor the financial strength of Britain’s banking system before lifting restrictions completely. That cap has now been lifted.

“Banks remain well capitalised and able to withstand headwinds to capital,” the Bank of England said in its bi-annual financial stability report on Tuesday. “The PRA [Prudential Regulation Authority] has therefore concluded that the extraordinary guardrails within which bank boards were asked to determine the appropriate level of distributions in relation to full-year 2020 results are no longer necessary and have been removed.”

Tuesday’s announcement sent bank shares to the top of the FTSE 100, with NatWest Group up 2.2%, HSBC up 1.7%, and Lloyds and Barclays each up 1.4% in early trading.

Banks already started to release hundreds of millions of pounds worth of bad debt provisions that were originally meant to cover potential defaults linked to the Covid crisis earlier this year, thanks to improving economic forecasts. With the final restrictions on dividends lifted, UK banks could end up promising more cash to shareholders when they release second quarter results at the end of the month.

However, the UBS banking analyst Jason Napier said that most lenders were likely to wait until next spring, when they release full year earnings, to announce further shareholder payouts given the continued uncertainty.

“We assume that substantial payouts will wait for FY21 announcements, pending a reduction in mobility restrictions, increased vaccination coverage, an end to furloughs, substantial start to bounceback loan repayments, stress test results and full-year audit processes,” he said.

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