Will UK banks restore dividends in 2021?

• UK banks scrapped billions worth of dividend payments to shareholders amid Covid-19
• The size and scale of the economic fallout from the virus remains unclear
• British lenders could see dividends return in 2021

The Big Four banks (Lloyds, Barclays, NatWest (formerly Royal Bank of Scotland) and HSBC) all cancelled their dividends in 2020 after the Prudential Regulatory Authority (PRA) advised British lenders to set aside capital to support the UK economy and a rise in bad loans due to Covid-19.

‘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 said in a statement in April this year.

The news sent UK lenders shares tumbling, with many investors drawn to bank stocks for their reliable returns, but the economic fallout from the coronavirus pandemic looks likely to get a lot worse before its get better. But when will dividend payments return for shareholders?

When will UK banks pay dividends again?

The answer is unclear, with the Big Four all publishing second quarter (Q2) earnings in July that revealed the extent of the damage, with British banks setting aside more than £16 billion for potential loan losses – wiping out profits in the process.

Having said that, the overall health of British lenders remains relatively high and in much better shape than in the wake of the 2008 financial crisis due to banks operating under tighter regulations and capital requirements ensuring balance sheets were relatively well prepared for an economic shock.

Regulators decision to tell British banks to suspend dividends is certainly bad news for investors over the short-term. Over the longer term, however, it will not only allow banks to avoid collapsing under the weight of Covid-19, but support the recovery of the wider UK economy and help them to resume distributing capital to shareholders sooner.

‘Banks are well capitalised to weather this pandemic and that they should get through it without the need to raise capital, or in the worst case close the doors altogether,’ Morningstar analyst Niklas Kammer said earlier this year.

‘So, while we think that 2019 dividends, which have not been distributed yet, and 2020 dividends are likely to be cancelled fully. We think banks should be able to resume cash distributions in late 2021.’

Will UK banks bring back dividends in 2021?

The time it takes for UK lenders to resume dividend pay-outs to shareholders really depends on the size of loan losses due to the coronavirus pandemic. However, it is still unclear just how much damage the UK economy has suffered, with loan schemes to small and medium-sized businesses, along with the government’s furlough scheme postponing credit defaults for the time being.

But the job retention scheme is set to unwind in October - though there are calls for it to be extended - which could lead to a rise in loan defaults as up to nine million people who rely on it could be left without work.

If that is allowed to happen the UK economy will suffer tremendously and banks will see credit defaults rise. But until a complete picture is formed showing the actual size and scale of the damage of the pandemic it is difficult to know how long it will take for the UK economy and the banks it relies on to recover.

What is clear is the impact the dividend suspension and the grim economic outlook is having on UK banks, with Lloyds, Barclays, NatWest and HSBC shares all down more than 44% year-to-date with further losses likely in 2020.

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