Dividends at the UK's largest banks are expected to increase in 2024 and beyond, as lenders seek to boost shareholder distributions while posting strong profits and keeping costs in line.
All five of the largest UK banks — HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, NatWest Group PLC and Standard Chartered PLC — are forecast to raise dividend payouts in 2024, consensus estimates compiled by S&P Global Market Intelligence show. Those dividends are set to keep growing or at least hold steady in 2025 for every bank in the group except HSBC.
The UK's biggest banks ramped up distributions in 2023 as rising rates lifted profits, with the total amount of paid-out or announced dividends and share buybacks across the five lenders surpassing £27 billion. The group also pledged to continue rewarding shareholders in the next three years. Several raised midterm profit targets and all announced plans to curb costs and improve efficiency.
Capital plans
Of the big bank group, HSBC distributed the highest amount by far in 2023 at $19 billion, on the back of strong interest income growth and gains from recent acquisitions and asset sales. It paid its highest dividend since 2008, 61 cents per share, and added $7 billion in buybacks.
"We still expect to have substantial distribution capacity going forward," CEO Noel Quinn said during a Feb. 21 earnings call. HSBC has promised a special dividend of 21 cents per share upon the planned sale of HSBC's Canadian business, expected to close by the end of the first quarter.
Lloyds' distributions for 2023 hit £3.8 billion as the group raised its ordinary dividend by 15% and launched a buyback of up to £2 billion. It announced plans to boost future distributions by paying out excess capital from a reduced common equity Tier 1 (CET1) ratio target of 13% by the end of 2026. At 13.7%, Lloyds' 2023 pro forma CET1 ratio was above that target and capital generation excluding distributions is expected to come in at about 175 basis points in 2024, rising to more than 200 basis points in 2026, the bank said Feb. 22.
NatWest reported total distributions for 2023 of £3.6 billion and said it would aim to maintain a 40% payout ratio for ordinary dividends with capacity for buybacks in the three years through 2026. The 2023 buybacks supported the reduction of the UK government's stake to 35% from 46%. The state aims to fully exit NatWest by 2026 via a retail share offer, permanent group CEO Paul Thwaite said in a recent earnings call.
Barclays' 2023 distributions reached £3 billion as the group hiked dividends for the year by 37% and launched buybacks of up to £1.75 billion. The UK group, which was under pressure to boost investor returns, announced plans to distribute at least £10 billion by 2026 as it curbs risk-weighted asset growth in its investment bank in a strategic reshuffle.
Standard Chartered's overall distributions amounted to $2.7 billion in 2023, including $2 billion in buybacks and $700 million in ordinary dividends. The bank plans to distribute at least $5 billion by 2026, it said in a late-February earnings update. Berenberg analysts forecast StanChart's distributions will reach about $6 billion by 2026.
Return expectations
To boost investor returns in the next three years, big UK banks have bet on robust profits and cost discipline. Consensus estimates for return on equity within the group suggest a slight decline in 2024 and a rebound in 2025 for most, data compiled by Market Intelligence shows. Only HSBC and Lloyds are expected to book ratios above 10% in 2024 and 2025.
Efficiency ratios are likewise expected to improve in 2024 and 2025. Only HSBC is expected to see a slight increase in the ratio, which measures noninterest expense as a share of revenues, in 2025.
Both StanChart and Barclays have set higher goals for return on tangible equity (ROTE) by 2026 and announced plans for further cost savings. Having reached double-digit ROTE for the first time in a decade last year, StanChart aims to achieve 12% in 2026. Barclays is targeting ROTE of more than 12% for that year, compared to 9% statutory ROTE booked in 2023.
Lloyds, which booked 15.8% ROTE thanks to interest rate tailwinds in 2023, sees this falling to about 13% in 2024 but increasing again to more than 15% in 2026, driven by cost-saving efforts and additional revenue growth unlocked as part of ongoing strategic initiatives.
HSBC and NatWest both vowed to keep a lid on costs in 2024. HSBC targets ROTE in the mid-teens for 2024 after booking 14.6% ROTE for 2023, while NatWest expects 2024 ROTE to normalize to about 12% from the 17.8% booked in 2023 as rate tailwinds subside. In 2026, NatWest expects ROTE to rise to about 13%. HSBC did not provide guidance for 2026.
Return risks
Apart from possible interest rate cuts and shifts in depositor behavior, banks also face idiosyncratic issues that could prevent them from reaching their ROTE targets in the next three years.
Analysts are still worried about HSBC's and StanChart's exposure to China, as both banks had to hike provisions on their Chinese commercial real estate (CRE) books in 2023 and devalue their holdings in some Chinese banks.
HSBC is less concerned about its Chinese CRE book now as it is already provisioned against potential risks and has reduced its exposure, according to CFO Georges Elhedery. However, additional value adjustments on the group's stake in China-based Bank of Communications Co. Ltd. cannot be ruled out, he said.
Meanwhile, Lloyds is exposed to a regulatory probe into alleged legacy car loan misselling in the UK and has already had to hike provisions as it anticipates potential customer claims.
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