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Bank of England: UK banks can resume paying shareholders dividends

Bank of England: UK banks can resume paying shareholders dividends
Source: Getty Images

Bank shareholders in the UK have a reason to rejoice after the banking regulator gave lenders the green light to restart dividend payments and banker bonuses. Let’s take a closer look at the news.

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When were bank dividend payments stopped?

Back in March, the Bank of England (BoE) ordered lenders to cancel any unpaid 2019 dividend payouts to shareholders. 

The BoE also ordered banks to pause dividends and share buybacks until the end of 2020. Cash bonuses for executives were halted too.

The BoE wanted banks to preserve their capital at a time when lending was needed to support the economy.

Why can banks now restart dividend payouts?

The Bank of England’s Prudential Regulatory Authority (PRA) said in a statement that it carried out stress tests of banks’ capital positions. It judged that banks “are resilient to a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations”.

According to the PRA, banks “remain well capitalised and able to support the economy”. Consequently, the regulator concluded that there is scope for the banks to resume distributions to shareholders.

But it was quick to add that this should be done within an appropriately prudent framework.

The PRA said that it expects that “any distributions would not create excess vulnerabilities to stress for a given bank or impede its ability or willingness to support households and businesses”.

In line with this, the PRA has capped payouts at 25% of a bank’s cumulative profits over the previous two years or 20 basis points of risk-weighted assets as at the end of 2020, whichever is higher.

Several recent developments could also have played a role in the PRA allowing banks to restart payouts. One is the approval and roll out of a Coronavirus vaccine in the UK. The other could be the extension of government support schemes for businesses.

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How has the news been received?

The return of dividend payouts will be welcome news for bank shareholders. It will be particularly good news for those who expect regular income from payouts. However, the news has not gone down well with everyone.

Sir John Vickers, the former chairman of the Independent Commission on Banking has accused the BoE of ‘pandering’ to banks, according to the BBC.

Sir John is quoted saying that in the midst of the Coronavirus and Brexit uncertainties, and with the share prices of banks still down, it’s not a good time for banks to be allowed to resume payouts.

Is now a good time to invest in banks?

When it comes to investing, it’s always best to ignore trending news headlines. The best option is sticking to a long term investment strategy that’s based on your preferences and capabilities.

But at the same time, certain events provide chances to pick up shares for your portfolio at low prices.

For example, banks’ share prices have fallen sharply this year due to the impact of coronavirus on the economy. Lloyds’ shares are down by 44%, while Standard Chartered and NatWest shares are both down by 34%. HSBC shares have fallen 32% and Barclays’ are down 23%.

If you’ve got funds to spare and can withstand a little risk, you could pick up a few of these shares while they are still down, through one of our top-rated share dealing accounts, and add them to your portfolio.

There is potential to make gains in the long term, once the economy is back on an upward path.

Besides, banks now have permission to resume dividend payouts. So you could also start getting regular income in the form of dividends sooner than later.

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