Coronavirus forces UK banks to freeze their dividend payments

UK listed companies have already slashed billions worth of dividends, while many more look likely to face the chop.

The UK’s main banks have all agreed to scrap their dividend payments to shareholders, in a bid to be better placed to support the economy during the current uncertain climate.

The country’s biggest banks, in a series of co-ordinated statements, announced that they would temporarily suspend dividend payments and share buybacks for both 2019 and 2020, following talks with the Bank of England. The big five UK banks are Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered. In total, nearly £8 billion worth of payments will be suspended.

Before the announcement, each of the main UK banks were on generous yields, owing to the market declines they have seen since the seriousness of coronavirus became apparent. For example, Lloyds Banking had a dividend yield at present of 10.5%, Barclays 9.6%, Royal Bank of Scotland 4.4%, HSBC 9% and Standard Chartered 4.9%.

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According to Richard Hunter, head of markets at interactive investor, the announcement that banks will be suspending dividends and share buybacks has two main reasons. First, he notes it “ticks the boxes of moral duty.” Given the current economic climate, banks providing generous remuneration to shareholders may be seen as in bad taste. Second, a collective £8 billion is now staying on the balance sheets of banks, giving them “an additional capacity to lend.”

The announcement follows a recent call from the head of the Bank of International Settlements for banks to suspend dividends and share buybacks, arguing that banks need to be able to provide maximum support to struggling businesses during coronavirus lockdowns. US banks recently announced a pause on share buybacks (which are preferred over dividends in the US) for this reason. The European Central Bank has also called on banks in its jurisdiction to take similar measures.

However, as Hunter notes: “From an investment perspective it removes a core plank of the case for buying bank shares.” This can be seen in the market reaction to the news. Lloyds Banking, Barlcays and Royal Bank of Scotland (RBS) have all fallen by over 5% since the start of today’s trading (at the time of writing at 11am), meaning they are now all down by over 50% since the start of the year. RBS has suffered the worst decline since the start of 2020, down 56%.

The news will come at a bad time for income investors. UK listed companies have already slashed billions worth of dividends, while many more look likely to face the chop. As Hunter notes: “Income investors are faced with a rapidly shrinking universe.”