UK banks given green light to restart dividends with 'guardrails'

Britain’s banks have been given the green light to restart payouts to shareholders, although the size of dividends and buybacks has been capped for now.

The Bank of England said in a statement late on Thursday that it had decided banks could resume dividends and other capital distributions after assessing the strength of the sector. Payouts were banned in March amid concerns that banks could run low of capital as the COVID-19 crisis battered the economy.

The Prudential Regulation Authority — the organisation within the Bank of England responsible for oversight of the sector — said it had undertaken two recent stress tests and concluded banks “remain well capitalised and able to support the economy.”

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It said an extension to the dividend ban was therefore “not necessary.” However, payouts will be limited. The PRA is putting in place “guardrails” to prevent excessive payouts, given the ongoing impact of COVID-19 and the uncertainty around Brexit.

“Distributions to ordinary shareholders by large UK banks should not exceed the higher of: 20 basis points of risk-weighted assets as at end-2020; or 25% of cumulative eight-quarter profits covering 2019 and 2020 after deducting prior shareholder distributions over that period,” the PRA said.

Any exceptions to these rules must be discussed with the regulator, which will set “a high bar for justifying any exceptions.”

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Banks have also been approved to restart bonus payments to staff. The PRA said banks should exercise “a high degree of caution and prudence in determining the size of any cash bonuses” but did not set any explicit limits on payouts. The regulator said it would “scrutinise proposed pay-outs closely.”

The PRA said it would transition back to regular dividend and bonus rules across the course of 2021, depending on the path of the pandemic.

Shares in UK banks jumped as much as 2% on the news. Chief executives at some of Britain’s biggest banks — including HSBC (HSBA.L) and NatWest (NWG.L)— have all signalled plans to restart dividends as soon as possible.

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