UK Banks Scrap Shareholder Distribution: US to Follow Suit?

In a significant move, major U.K.-based banks have decided to suspend all types of shareholder distributions. This is likely to act as a buffer against expected losses from economic slowdown, driven by the global coronavirus pandemic.

Suspension of Dividends & Share Buybacks

In a coordinated move, Barclays BCS, Royal Bank of Scotland RBS, HSBC Holdings HSBC, Standard Chartered and Lloyds Banking Group LYG announced the suspension of their outstanding 2019 dividend payments. In aggregate, these five banks were due to pay roughly £8 billion ($9.3 billion) as dividends through May 2020, with HSBC being the biggest payer at £4.2 billion.

Also, the banks have decided not to make any dividend payments this year and have suspended share repurchases. HSBC noted that though its first-quarter 2020 performance has been “resilient”, the coronavirus-related impacts are expected to hurt reported revenues and result in a rise in loan losses.

The move came after the Prudential Regulatory Authority (PRA) wrote to banks asking to cancel payments to shareholders. The most immediate impact from the move will be on the shareholders of Barclays, which is due to pay a full-year dividend worth £1 billion this Friday.

Nigel Higgins, Barclays’ Chairman, said: “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.”

Following the announcement, shares of Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking on NYSE declined in the range of 4-10% during today’s pre-market trading.

U.K. Follows Euro-Zone Banks

Last week, the European Central Bank (ECB) asked banks to suspend shareholder distributions until at least October and use the additional capital to support the economy that is hurt by coronavirus.

Paying heed to ECB’s demand, several Euro-zone banks including UniCredit S.p.A., ABN Amro Bank N.V., Societe Generale, Commerzbank AG and ING Groep N.V. ING have decided to halt dividend payments and suspend buybacks this year. Nonetheless, UBS Group AG and Credit Suisse plan to move ahead with 2019 dividend payments.

Bonus Cuts Expected

Banking regulators are urging banks to slash bonuses of their executives. The ECB stated that banks must be “conservative” in rewarding bonuses, and instead preserve capital and keep lending during the current crisis.

Some of the lenders like UniCredit and Banco Bilbao Vizcaya Argentaria, S.A. BBVA have already announced the waiver of top management bonuses this year.

Similarly, the PRA commented that it “expects banks not to pay any cash bonuses to senior staff, including all material risk takers.” Nonetheless, banks have made no such announcements related to bonus cuts.

Will U.S. Banks Follow Suit?

Eight major U.S. banks including Bank of America BAC, Bank of New York Mellon and Citigroup have already suspended share repurchases since mid-March through June-end. Subsequently, several small and mid-sized banks like BankUnited, PNC Financial and Regions Financial have also joined in.

Till now, none of the banks have made any announcement regarding dividend cuts and have instead stated that they will continue doing the same. Even while halting share buybacks, banks had commented that they are doing so to support the economy from coronavirus-related slowdown and not because of any liquidity issue.

However, banks are facing pressure from various quarters to slash dividends. Several lawmakers, former regulators and consumer advocates have been stating that while banks are taking advantage of emergency funding programs launched by the Federal Reserve, it is highly inappropriate for them to continue paying dividends to their shareholders.

Now, with the U.K. and Euro-zone banks suspending all shareholder distributions this year, the U.S. banks are likely to face all the more pressure to follow suit.

Many banks still face the stigma associated with the 2008 crisis as they were the primary reason for it. Therefore, in order to show their willingness to go to any extent for supporting the economy, banks may cut dividends for appearance’s sake.

However, this is bad news for investors as many invest in stocks just for steady dividend income. Thus, this could be another major blow for banks, which are already facing bearish investor sentiments owing to the expected fall out of economic slowdown.

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