British banks have improved their capital levels over the past several years, helped by regulatory intervention, but there are doubts over when they will return to paying dividends.

CET1 ratios as of the end of the third quarter at each of HSBC Holdings PLC, NatWest Group PLC, Barclays PLC and Lloyds Banking Group PLC have increased since the end of September 2016. Liquidity coverage ratios have also generally risen, with Barclays seeing a sharp rise over the past two quarters — it was the sole operator with a major investment banking operation that was well-positioned to take advantage of market volatility during the coronavirus pandemic.

The banks' capital strength may suggest they are in a position to resume dividend payouts. In March, the leading U.K. banks said they would cancel their dividends for 2019 and refrain from setting cash aside for this year, following a formal request from the Bank of England, which stopped just short of ordering them to do so. Share buybacks and cash bonuses to senior staff were also suspended.

Barclays CEO Jes Staley told the FT Live banking conference on Nov. 23 that central banks should look at how well banks had responded to the pandemic.

"Central banks, particularly in Europe and the U.K., need to think about how the banking industry, investment banking and consumer banking, has responded to this real-life stress test," he said. "This is a real economic shock. What has it said about the risks that banks carry and how they've managed those risks?"

He said banks' strong performance during the crisis had surpassed central banks' expectations and should be a wake-up call both to central banks and investors.

"We see that disconnect, I think, in the valuation of the leading banks and I think that merits a lot of thought," he said.

There are indications from banking supervisors in Sweden and Switzerland that the ban on dividends may be lifted as banks there have been allowed to set aside capital for buybacks or dividends. But Carolyn Rogers, secretary-general of the Basel Committee on Banking Supervision, told the Financial Times it was too early for banks to take a "victory lap" over their response to coronavirus.

Review

In the U.K., the BoE has begun an assessment on whether to extend the suspension on payouts such as dividends and share buybacks beyond the end of this year.

Lloyds Banking Group PLC CEO António Horta-Osório said at the FT Live event that the bank's board would decide on its dividend policy in February, depending on the outcome of the BoE's review.

"We recognize the importance of dividends to our investors; we are in a very strong capital position with a CET1 [ratio] above 15%, but there are still uncertainties around the economy, around capital generation and regulatory requirements, around Brexit. There has also been an unprecedented amount of regulatory forbearance that will unwind over time," he said.

NatWest, which is still 62% state-owned after being bailed out in the financial crisis, now has a CET1 ratio of 18.3%. Its CEO, Alison Rose, said its ratio was well above target and meant the bank is resilient enough to resist economic shocks.

"The banking sector has been remarkably resilient and that is testament to the last decade of repairing the balance sheets of all the banks," she said. "We will review our dividend policy at the end of the year, but paying dividends is an important part of the investor story; it is important for investors to have a yield from their investment in banks."

A note of caution

Colin Hunt, CEO of Allied Irish Banks PLC, sounded a note of caution over the possible payment of dividends, however, noting that the dividend ban was introduced by regulators as part of a series of measures, including a relaxation of capital buffers, to ensure banks were in a position to lend during the pandemic.

"I think it is premature to talk about lifting the ban at this juncture. I suspect the regulators will want to see the exact nature of broader economic scarring before they would agree to the resumption of the payments," he said.

Investec analyst Ian Gordon said he expects leading banks to remain profitable for full-year 2020 and, since they are all carrying capital considerably in excess of minimum regulatory requirements, they should pay dividends. He does not expect state-owned NatWest to declare a dividend but he does expect Lloyds, HSBC, Standard Chartered PLC and perhaps Barclays to do so.

"My working assumption is that the blanket dividend and buyback ban will be lifted in time for full year dividend declarations in February 2021, though perhaps there's some uncertainty over timing," he said via email.