Let the dividend bonanza in the banking sector begin? The Bank of England on Tuesday removed its Covid “guardrails” on distributions to shareholders, and boards now have a decision to make. Do they shower their investors with cash, in effect making up for nine dividend-free months in 2020 and the token payments that were made thereafter? Or do they conclude that the final bill for Covid-related defaults isn’t yet clear and, in any case, a display of dividend excess at this point would look terrible?
There’s little doubt the banks could afford to let rip, up to a point. The Bank’s Prudential Regulation Authority was correct to impose a dividend ban at the outbreak of the pandemic – as Sam Woods, its boss, said, it couldn’t allow £7bn of capital to leave the system when the economic outlook was so unclear – but it is also true that loans have not soured at anything like the rate originally feared.
By standard yardsticks, banks are swimming in capital. Threadneedle Street’s latest stress test imagined a 33% fall in house prices and a surge in the UK unemployment rate to almost 12% and still concluded the leading UK banks would use up less than 60% of their aggregate capital buffers.
Crunching the numbers, Jefferies’ analysts this week made the striking calculation that Barclays, Lloyds Banking Group and NatWest could afford to return 30% of their stock market values to investors between now and the end of 2023, either through dividends or share buy-backs, and still be within regulatory capital limits.
A lot of things would have to go well for that projection to come to pass, including more write-backs of provisions that were made amid the pre-vaccine uncertainty of 2020. But, in theory at least, banks could bound back to pre-pandemic dividend levels in a couple of easy strides. The Bank governor himself, Andrew Bailey, said “capital positions today are as high as they have ever been”.
In practice, boards would be foolish to promise anything more than a gradual return to dividend normality in their half-year results in a fortnight. As Bailey also said, the sector has been shielded from pain. The level of indirect state support has been enormous in the form of furlough payments, underwritten loan schemes and so on.
Yes, shareholders deserve bigger helpings if capital positions are so strong. There’s no point investing in a bank if shareholders can’t get a steady income. But the politics also matter. An immediate dividend party to celebrate liberation would be an own-goal.
US inflation figures ‘higher than expected’ … yet again
The monthly drama in the US inflation figures is becoming repetitive. Every time the number comes out higher than expected – the reading this time was 5.4% on an annual basis in June – but is greeted with a chorus that says special factors were at work and so nobody should be alarmed.
The latest “transitory” explanation was that used-car prices rocketed because the supply of new cars has been chocked by semiconductor shortages. Once the supply chain bottlenecks have been resolved, goes the thinking, consumer prices won’t be rising at their fastest pace since August 2008.
That theory is still intact, but every passing month of strong readings dents it a little. Back in April, “higher than expected” US inflation was supposed to represent a test of the US Federal Reserve’s transitory thesis. Now it’s July and numbers are still exceeding forecasts. One of these months the compliant bond market may decide to worry. There is a dangerous air of complacency.
British Land ends rent concessions
No more Mr Nice Guy. That wasn’t quite how British Land put its new approach to commercial tenants who won’t pay their rent. It is still in the business of taking a pragmatic and long-term view, especially when it comes to independent retailers and the small number of bars and restaurants in its properties.
But there was just a hint of menace: “With trading restrictions substantially lifted and the vast majority of our customers trading well and paying the rent due, we do not expect to make further concessions this quarter.”
Concessions, in this context, means rent deferrals or even write-offs. So, come the next payment date in September, normal rules are meant to apply. That policy can be justified: shops are open, after all. But 18% of rent from British Land’s retail tenants was classed as “outstanding” on the June quarter date. Maybe the shopkeepers will all fall into line in September, but it’s a very big gap to expect to close.