High street banks could potentially increase dividends and share buybacks once new capital requirements are announced early next year and there is more clarity on Brexit, according to analysts at UBS.
The Bank of England on Wednesday said all seven British banks and building societies passed this year’s stress test, which assesses the ability of lenders to cope with financial shocks.
The test looked at how well the banks can handle different tough economic scenarios, including a situation where Britain crashes out of the European Union in March without a deal or transition period.
READ: Lloyds, RBS, Barclays and other UK banks pass tough 2018 stress test ahead of Brexit
The Bank’s Financial Policy Committee said the test showed the banking sector would be “strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit”
Lloyds Banking Group PLC (LON:LLOY), HSBC Holdings PLC (LON:HSBC), Barclays PLC (LON:BARC), Royal Bank of Scotland Group PLC (LON:RBS), Nationwide Building Society, Santander UK and Standard Chartered PLC (LON:STAN) finished the test with capital buffers above their bespoke pass marks.
The BoE maintained the so-called countercyclical capital buffer rate at 1% but said it stood ready to change this “in either direction as the risk environment evolves”.
UBS sees potential for further shareholder rewards
UBS said: “New CET1 (common equity tier 1) capital requirements will be shared with lenders in Jan / Feb 2019. That, and hopes of clarity around the Brexit outcome should allow banks to increase dividends and buybacks.”
The investment bank added that the passing grades in the stress test and the Bank of England’s statement that lenders could handle a no-deal Brexit should underpin investor confidence that the firms don’t face an increase in capital demands.
Barclays said it remains its intention to pay a 2018 dividend of 6.5p despite faring the worst in the stress test with the lowest CET1 ratio.
UBS maintains 'buy' rating on Barclays, Lloyds and RBS
UBS still has a ‘buy’ recommendation on Barclays as well as Lloyds and RBS, each of which is sees trading at 7 x 2019 capital adjusted earnings per share.
“In the event that a Brexit transition is ultimately agreed – the path to which does look potentially bumpy – we'd expect to see these profitable, capital generative stocks re-rate materially,” it said.
ShoreCap sees 'good upside' to fair value estimates across banking sector
Shore Capital said it was not a surprise to see all banks pass the stress tests given that they are all now paying dividends and been talking about returning surplus capital to shareholders by way of share buybacks and special dividends.
“We continue to model and value the banks on the basis of a consensus macroeconomic outlook, which suggests UK GDP growth can be maintained at 1.0-1.5% with global GDP growth at 3.5-4.0% (we use the International Monetary Fund World Economic Outlook as our best guide for these estimates),” the broker said.
“On this basis, we see good upside to our fair value estimates across most of the sector, suggesting that the market is currently pricing in a materially worse outcome.”