UK banks rose on London Stock Exchange’s FTSE 100 index on Tuesday (July 13), after the Bank of England (BoE) removed restrictions on bank dividends and share buybacks imposed at the height of the Covid-19 crisis.
Shares of British lender Lloyds Banking Group moved up 0.7% higher, HSBC rose 0.6%, Barclays ticked up 0.1% and Standard Chartered was gaining 0.2% at 1:36 p.m.
“Extraordinary guardrails on shareholder distributions are no longer necessary,” the BoE said in its latest Financial Stability Report for July 2021 issued on Tuesday, judging the industry now has enough capital to resume payments as they wish.
“My view remains the case that [the ban] was an appropriate step to take with the crisis we faced,” BoE governor Andrew Bailey told a news conference. “Bank capital positions today are as high as they have ever been, partly due to government support shielding the system from pain it otherwise would have taken . . . Headwinds will emerge, but will be manageable.”
As Britain shut down much of its economy for the first time in March last year, the BoE told lenders to scrap nearly £8bn worth of dividend payouts due for the 2019 financial year. It also ordered banks to pause dividend payments throughout 2020, and put a temporary halt on share buybacks and cash bonuses for senior staff.
The BoE started to relax the restrictions in December, but maintained a limit on payouts to 25 per cent of quarterly profit and only allowed 2021 dividends to be accrued, not paid.
Threadneedle Street’s decision to drop those restrictions comes as the US Federal Reserve has already scrapped its payout limits, while the European Central Bank takes a more cautious approach, planning to let euro zone lenders resume payouts to shareholders from October.
The BoE also said that banks are capable of supporting UK businesses and households throughout the economic recovery from the Covid-19 crisis but also warned that risks to the recovery remain despite an improved economic outlook.
In a letter to Rishi Sunak, UK’s chancellor, Bailey, wrote: “Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming months.
“Based on its monitoring of bank resilience, the Financial Policy Committee (FPC) judges that the UK banking system has the capacity to provide that support. The banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast.”
According to the BoE, its FPC will stay “vigilant to debt vulnerabilities in the financial system that could amplify risks to financial stability” and examine “whether new tools are needed specifically for this purpose.” It also called for a “robust and coherent package of international reforms” to “address vulnerabilities in the global money market fund sector,”
In its twice-yearly Financial Stability Report, a review of the health of the financial system, the regulator noted the share of households with high debt-servicing burdens has risen slightly during the pandemic while remaining “significantly below its pre-global financial crisis level.”
It also noted that there is increased risk taking in financial markets, with some risky asset valuations appearing higher than previous performance.
The proportion of high-yield corporate bonds is at “its highest level in the past decade,” the central bank said, adding that this could “increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.”
Meanwhile, the BoE said it is working to make market-based finance more resilient and less likely to amplify shocks.
Britain’s economy shrank by 6.1% year-on-year in the first quarter of 2021, a fifth consecutive period of contraction, as activity and demand fell in response to the tightening of Covid-19 restrictions. Household consumption dropped 11% and fixed investment fell 3.2%.
In 2020, the economy experienced its biggest annual decline in 300 years. GDP fell by a record 9.9%. The contraction in 2020 “was more than twice as much as the previous largest annual fall on record”, the Office for National Statistics (ONS) said.
