UK, NZ banks forced to scrap dividends. Could Australia be next?

Shares in UK banks have fallen sharply after regulators forced them to cancel dividends for 2019 and 2020 in response to the coronavirus crisis.

The Prudential Regulation Authority (PRA), an arm of the Bank of England which oversees UK banks and building societies, wrote to seven “systemically important UK deposit-takers” asking them to suspend dividends payemtns and share buybacks until the end of 2020, and cancel the payment of any outstanding 2019 dividends. Bank bonuses are also being halted during the period.

“Although the decisions taken today will result in shareholders not receiving dividends, they are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption,” the PRA’s deputy governor, Sam Woods, wrote. He added that UK banks entered this crisis with strong capital positions.

Falls in the prices of shares such as HSBC (HSBA), Lloyds Banking Group (LLOY), Royal Bank of Scotland (RBS) and Standard Chartered (STAN) have put further pressure on the FTSE 100, which was down 4 per cent on Wednesday morning to 5,440 points.

Shares in HSBC dropped 9 per cent on the announcement, taking them to 400p, which marks a loss of 33 per cent since the start of the year.

This is the latest blow that the coronavirus crisis has dealt to UK income seekers; companies across all sectors are freezing, scrapping and reducing their dividends to shore up capital to survive.

European banks are also having to cut payouts after guidance from the European Central Bank. Morningstar banking analyst Johann Scholtz says the big EU banks have already taken pre-emptive action ahead of the ECB’s intervention.

“We are supportive of banks that are cautious about returning capital to investors during times when capital might be at risk in future. We would, however, have preferred that this happens by the banks' own accord, rather than a regulatory ‘suggestion’,” he says.

New Zealand’s central bank has also directed its banks to cease paying dividends or redeeming capital notes. The RBNZ also announced Australia's big four banks won't be able to receive dividends from their Kiwi subsidiaries during the coronavirus pandemic. The restrictions take effect immediately and remain in place until further notice.

Morningstar's Peter Warnes says it's possible Australia could follow suit.

"It’s prudent to conserve as much capital as possible as we don’t know the full effects on the economy and the likely default rates across mortgages, business and personal loan portfolios," he says.

It was reported on Tuesday that Australian bank regulator APRA was monitoring the issue but would allow banks to make their own decision on dividends.

Prime Minister Scott Morrison said today that the matter had been considered but no advice on blocking dividends had been given.

“That’s a matter that’s been considered by the Council of financial regulators and that’s not a move that’s been decided at this point," he told reporters in Canberra.

“I’m aware of the decision of the New Zealand agencies [but] at this point the Australian Government, through our financial regulators, we have not received that advice to move to that level,” he said.

Financial crisis part two?

UK banks have spent many years since the financial crisis rebuilding trust with UK income investors. RBS, for example, didn’t pay a dividend for 10 years after being rescued by the UK Government. From an income perspective, banks have been a decent bet in recent years: they have been forced by regulators to have strong financial buffers and have paid decent yields. Special dividends from the likes of RBS have added to the appeal, making the sector one of the biggest contributors to a record 2019 for UK dividends.

Wealth manager Killik said of the PRA's announcement: “While this is clearly disappointing for shareholders, it is the correct decision given the uncertainty surrounding the depth and duration of the economic slowdown and the impact on the banking sector.” It adds that the UK banks are in a much stronger position than during the financial crisis.

According to Morningstar Direct data, UK banks were boasting strong yields before this announcement: Lloyds was yielding nearly 10 per cent, HSBC nearly 9 per cent and RBS over 4 per cent. Some of these yields have been stretched by big falls in the company share prices: Royal Bank of Scotland, for example, started the year at 240p and is now at 106p, a fall of 55 per cent.

A version of this article originally appeared on Morningstar.co.uk. Additional reporting from Emma Rapaport, editor, Morningstar.com.au.