UK bank sector dividends: what to expect from the Big Five

All of Britain’s major banks are poised to grow fourth quarter dividends, but by how much? Our City writer looks ahead to bank sector results season and what’s expected to happen.

Results season for Britain's major banks is set to deliver bigger dividends and fresh buybacks as the sector gets to show why valuations have re-rated from October’s low.

Share price gains of 12% and above have already been seen at Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) this year, but many City analysts think there’s further to go based on expectations that most of the interest rate cycle is still ahead in terms of sector earnings.

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Loan books are regarded as much more robust than in previous downturns, and the chances of a severe recession appear to be diminishing as wholesale energy costs start to fall.

The improved outlook was highlighted this week when Bank of America named HSBC Holdings (LSE:HSBA) and NatWest as two of its preferred European picks, with respective price targets of 720p and 430p. The shares were 615.8p and 306.4p at last night’s close.

The bank said: “Overall, we see the sector offering strong earnings and dividend growth on trough multiples and peak yields.”

While the sector’s recent share price rally has increased the risks going into this results season, analysts at UBS believe that bank stocks remain attractive at 6.1 times 2024 forecast earnings versus European peers on 6.8 times and the wider UK market on 10.1 times.

It said this discount was driven by market and political upheaval in 2022 and the lack of decent dividends since the financial crisis. UBS analyst Jason Napier added that investors still remember past disappointment, having seen UK domestic banks deliver a cumulative statutory loss of £5.5 billion over 2010-19 due largely to below-the-line charges. 

Capital positions are now much stronger, and the recent pace of rate hikes means that shareholder distributions are set to improve, with all five of Britain’s major banks poised to grow fourth quarter dividends and all but HSBC due to announce buybacks.

Analysts at Jefferies believe that over the next three years NatWest, Lloyds and HSBC will return more than 30% of their valuations over the period.

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For HSBC that will include the proceeds from the planned sale of its Canada business to RBC, which is likely to unlock $10 billion (£8.3 billion) of buybacks in 2023 and 2024 as well as a $4 billion special dividend (£3.3 billion).

Jefferies said last month: “While 2022 favoured rate-sensitive banks, we expect 2023 to favour quality banks and capital return stories at reasonable prices.”

Lloyds is among the European banks that Jefferies believes fit this description, leading to a “buy” recommendation and upside to a price target of 75p. It expects the lender’s estimated 17% return on tangible equity (ROTE) to be more appreciated by the market over the coming months, meaning there’s a material re-rating potential.

Across the sector, analysts at UBS forecast a 13-14% ROTE but with NatWest near to 20%. In September, the state-backed lender paid an interim and special dividend of 20.3p a share, although distributions will now normalise as it moves into its target capital range.

However, higher profitability is capital generative, and this should support NatWest’s ongoing dividends and buybacks plans.

UBS’s Napier believes further upgrades to net interest income forecasts will be necessary for investors to significantly revise their risk/reward views.

He added: “We expect no noticeable credit defaults, which the market will dismiss on the basis that it's too early rather than that credit risk is low. We'll be focussing most on the top line, with cost inflation and capital distribution also making top billing.”

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Barclays (LSE:BARC) is due to kick off the results season on Wednesday before Standard Chartered (LSE:STAN) the following day and NatWest on Friday 17 February. The following week sees figures from HSBC before results by Lloyds Banking Group on 22 February.

The numbers below are UBS estimates as at 18 January 2023:

Barclays (15 February)

Q422

• Pre-tax profit £1.4 billion (Q3: £2 billion, Q421: £1.5billion).
• CET1 13.3% (Q3: 13.3%, Q421: 15.1%).
• Dividend: 4.5p a share (2021 4p) and £500 million buyback.

FY22

• Pre-tax profit £7.1 billion (FY21: £8.4 billion)
• Dividend: 6.75p (2021 6p) and £1 billion buyback
• UBS recommendation: Buy, price target 262p.

HSBC (21 February)

Q422

• Adjusted profits $6.1 billion (Q3: $6.5 billion, Q421: $4 billion)
• CET1 14.1% (Q3: 13.4%, Q421: 15.8%)
• Dividend: $0.21 (Q4 $0.18). No buybacks until 2023.

FY22

• Adjusted profits $23.3 billion (FY21 $21.9 billion).
• Dividend: $0.30 (2021 $0.25).
• UBS recommendation: Buy, 700p.

Lloyds Banking Group (22 February)

Q422

• Pre-tax profit £1.75 billion (Q3: £1.5 billion, Q421 £968 million)
• CET1 15.4% (Q3 15%, Q421: 17.3%).
• Dividend 1.4p (2021 1.33p), with £2.25 billion buyback (2021 £2 billion).

FY22

• Pre-tax profit £6.9 billion (FY21 £6.9 billion)
• Dividend: 2.2p (2021 2p)
• UBS recommendation: Buy, 70p.

NatWest (17 February)

Q422

• Adjusted profit £1.2 billion (Q3: £1.2 billion, Q421: £729 million)
• CET1 of 14.4% (Q3 : 14.3%, Q421: 18.2%)
• Dividend 8.1p (7.5p) and £500 million buyback

FY22

• Adjusted profit £5.2 billion (FY21 £4.3 billion)
• Dividend 28.4p (10.8p), including September’s interim and special award of 20.3p.
• UBS recommendation: Buy, 375p. 

Standard Chartered (16 February)

Q422

• Adjusted pre-tax profits $673 million (Q3: $1.4 billion, Q421: $138 million).
• CET1 13.7% (Q3: 13.7%, Q421: 14.1%).
• Dividend $0.11 cents ($0.09), plus buyback of $750 million.

FY22

• Adjusted pre-tax profits $4.91 billion ($3.9 billion).
• Dividend of $0.15 ($0.12).
• UBS recommendation: Buy, 825p.