Why banks should be allowed to pay dividends again
Curbing payouts to shareholders never made much sense and the policy is crimping the economy, says MAtthew Lynn.
The Bank of England is working out the details of a deal that will allow the retail banks to start giving money to their shareholders again. So long as net lending continues to grow, and capital ratios remain robust, they will be allowed to restore their dividends. That is a significant reversal. At the height of the Covid-19 crisis in the spring, the Prudential Regulation Authority wrote to the main banks asking them to cancel any remaining payouts for 2019 and for the whole of 2020. In recent weeks both Barclays boss Jes Staley and Santander’s Ana Botin have called for an end to the ban in public, and now it looks as if, subject to a few conditions, that will be allowed. HSBC said this week that it was likely to start paying a dividend again soon.
A monstrous imposition
Cancelling the dividends took a heavy toll on the share prices of all the main banks this year. From 130p before the crisis, Barclays slumped below 100p before recovering slightly. Lloyds went from 63p at the start of the year to below 25p. NatWest (formerly RBS) dropped from 240p to below 100p, and HSBC from close on 600p in January to below 300p. That is a terrible performance. But then what could be expected? If a company is not allowed to pay out dividends it is hard to see any point in owning the shares – and we can hardly blame investors for selling out. It would help both the banks and the wider economy to restore those dividends as quickly as possible. Here’s why.
First, it is not the job of the Bank of England or its supervisory arm to control payouts to shareholders. The ban should never have been imposed in the first place. Sure, if the banks had been behaving recklessly and heading towards collapse, then it would have been reasonable to stop that. But that wasn’t happening. The main banks were chugging along fine, and making profits, much as usual. In its third-quarter results published this week, HSBC made more than £3bn in profits. If it wants to pay some of that out to its shareholders, there isn’t any reason why it shouldn’t. Likewise, Barclays made profits of more than £600m in the third quarter. Why shouldn’t shareholders get a slice? The ban on dividends was in truth more a PR stunt designed to pander to public opinion than it was anything to do with “prudential regulation”. It is not up to regulators to decide how a business is run or what it chooses to do with the money it makes. That is up to its owners and managers.
It’s not just the banks that are hurting
The second point is that the policy weakened all the retail banks. A bank with a plunging share price and unhappy, disgruntled shareholders looking for an exit, is not going to be a very happy place. The CEO will be under pressure, confidence will be damaged and staff will be worried about their jobs. A bank in those circumstances is not going to lend more, or launch new products, or offer help to customers in trouble. To get out of a recession you need healthy, buoyant banks – and you don’t create those by wrecking their share prices.
Finally, the dividend ban weakened the whole stockmarket as well. Retail banking is a major component of the FTSE 100 index. The high street banks are among its biggest companies. Hammer their share prices with dividend controls and it is not very surprising that the entire index quickly found itself under pressure. UK equities have performed far worse than most major rivals, and that is a big part of the explanation. Just as significantly, the banks represent a major part of the total dividends paid out by the FTSE 100. Of the ten FTSE companies paying out the biggest total dividends in 2019, two were retail banks: HSBC, with a total payout of more than £8bn; and Lloyds, with a payout of more than £2bn. Strip those out of the total, and the dividend yield on the whole index takes a significant hit. Investors then have less money to spend, and less to re-invest, and that hurts the whole economy. The sooner dividends are restored, preferably without any conditions attached, the better for everyone.