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Wednesday, November 29, 2023

U.K. Banks Freed From BOE’s Pandemic Dividend Restrictions

Britain’s biggest banks will be able to increase shareholder payouts after the Bank of England removed restrictions imposed at the height of the pandemic to make sure lenders could weather deep losses.

The BOE said Tuesday it is fully removing guardrails that limited dividends this year at HSBC Holdings Plc, Barclays Plc, Standard Chartered Plc and other top lenders. The central bank concluded the industry now has enough capital to resume payments as they wish.

The central bank’s Prudential Regulation Authority said its limits “in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect,” according to a statement. The move comes a day after the European Central Bank signalled its caution over a quick return to dividends.

The rollout of vaccinations and results of interim stress tests bolstered the PRA’s view that banks could return to a standard approach to capital-setting and shareholder distributions. The BOE began to relax its de facto ban on dividends in December, but kept a cap of about 25% of quarterly profit and said 2021 dividends could be accrued but not yet paid.

Shares in British banks rose after the announcement. NatWest Group Plc increased as much as 3.4%, Lloyds Banking Group Plc rose as much as 1.8%, HSBC rose as much as 2.7%, Barclays rose as much as 2.2% and Standard Chartered increased as much as 2.1%.

Optimistic Approach
The BOE’s move compares to a more cautious approach by the European Central Bank, which has capped payouts through September while also extending relief from bank leverage restrictions to help firms continue lending. A top official said Monday the ECB could take steps to ensure that lenders avoid paying excessive dividends later this year, when it will “most likely” lift its cap.

The U.S. Federal Reserve, meanwhile, has relaxed restrictions in a sign that authorities are more optimistic about the industry’s ability to manage borrower defaults while also rewarding shareholders. While Covid-19 ravaged the economy and stoked the U.K.’s worst recession in 300 years, emergency steps by the government and industry have kept loan losses so far well below worst estimates.

Still, authorities have warned that defaults could increase once temporary help such as payment holidays expire.

The PRA said Tuesday that banks should “continue to exercise an appropriate degree of caution around the level of any shareholder distributions,” and that “it is essential that banks continue to support households and businesses through the economic recovery and as the government’s support measures unwind over the coming months.”

Health Check
The PRA statement came as the Bank of England released its latest health check on the U.K. financial system, known as the Financial Stability Report.

The central bank “continues to judge that the banking sector remains resilient” to worse crises, and can weather the credit losses that are currently below the levels initially feared at the beginning of the pandemic.

While the U.K. economy is rebounding from 16 months of lockdowns, the BOE has flagged that millions of Britons remain vulnerable to financial distress. Businesses, meanwhile, have accrued almost 80 billion pounds ($111 billion) of emergency loans, backed by the government, to keep them afloat during the pandemic.

Most of England’s remaining limits on socializing are due to be lifted on July 19 and the furlough program will stop in September, having supported 30% of the U.K. workforce at its peak last year.

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