The FTSE 100 lurched lower in early trading today. I reckon some of the move has been down to plunging bank shares within the index.
And there’s a good reason for weakness in the banking sector. In a coordinated action, the London-listed banks cancelled shareholder dividends and share buy-back programmes after the Prudential Regulation Authority (PRA) insisted on it yesterday. According to news reports, the PRA threatened to use its supervisory powers to force compliance if the banks didn’t release statements of their intention to cancel – strong-arm stuff!
What the banks said
And Lloyds got a statement out at 7am today. The company said it has decided to cancel all quarterly and interim dividend payments, accrual of dividends, and share buybacks “until the end of 2020.” On top of that, “in response to a request from the PRA” and to preserve additional capital, the directors agreed to cancel payment of the final 2019 dividend.
There was a similar announcement from Barclays today. And chairman Nigel Higgins explained the directors believe the move is “right and prudent” to ensure the company is “well placed” to continue what it can “to help through this crisis.”
HSBC also made it clear this morning it was cancelling dividends and share buy-backs during 2020 because of the PRA’s request. The directors said they recognised the ongoing “material impact” on the global economy because of the coronavirus pandemic. And despite “a strong capital, funding and liquidity position,” there are “significant uncertainties” regarding the timescale of the pandemic and its economic effects.
Rational and bold
I’m with the PRA. Just over a decade ago, the weak banking sector came perilously close to breaking the economic system beyond repair during the credit crunch and the recession that followed. Bold and early action now to preserve the financial strength of banks seems like a rational move.
However, this won’t be welcome news if you’re holding banking shares because of their previous fat dividend payments. But I’d argue – and have been for years – that banks shares are not good vehicles for dividend-led investing strategies. The main problem is that bank businesses are among the most cyclical you’ll ever come across. Indeed, it’s been said that bank shares can be the first in and the first out of recessions.
As such, I think bank stocks can be good early indicators of where economies could be heading. And looking at the way Lloyds, Barclays and HSBA are either under-cutting or re-testing their earlier coronavirus lows today makes me believe we could be heading for some seriously tough times ahead.
But there’s an opportunity in that assessment when it comes to banks. Because one thing bank shares are good at is leading and exaggerating bull and bear markets. I think banks will make decent vehicles for riding the next general market up-swing at some point.
Meanwhile, to me, the slashing of dividends is a good sign. That’s because it takes us closer to ‘the bottom’ for bank shares. All I want to see now is reduced forecasts for earnings and I’ll start to become bullish on bank shares.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.