Investors reacted with their feet after the UK’s major banks suspended dividends at the behest of the Bank of England.
Shares in all of the banks slumped on the news led by HSBC PLC (LON:HSBA), which tumbled more than 9%, Lloyds Banking Group PLC (LON:LLOY) down 7% and Barclays 7.7% lower.
Analysts pointed out that as well as UK institutions, HSBC (and Standard Chartered) also have substantial numbers of Asian investors who hold for the dividend, which might explain why they had heavier falls.
Peel Hunt said given the actions taken by many other companies to scrap dividends and a likely material increase in bad debts due to the coronavirus lockdowns the move was predictable.
“Our default expectations would be that banks will be a dividend-free sector for the coming year.
“HSBC has noted [today] that impairment charges are higher in Q1 2020 and whilst the trend remains upwards we view the sector as a high-risk investment.”
Other brokers said that the dividend suspensions were disappointing especially as with all the uncertainty there is a doubt they will be paid next year either.
Barclays' chairman Nigel Higgins said it had been a difficult decision but was the correct one.
“The bank has a strong capital base, but we think it is right and prudent for the many businesses and people that we support, to take these steps now.”
Barclays was due to pay a dividend of £1bn on Friday and it was this and a clampdown on payouts in Europe that prompted the move by the Bank analysts had said yesterday.
The banks, plus Spanish bank Santander and building society Nationwide, were also told to stop payments of bonuses not already agreed.
Payments from the banks account for around 12.5% of the UK's dividends and Kevin Doran, chief investment officer at AJ Bell, asked the question of what they should do with the extra £7.5bn.
He suggests the cash should “repay the British public for the bailout the banks received during the Financial Crisis by writing of debt repayments for those most affected by the Covid-19 crisis”.
“The gross revenue generated by the UK banking sector from interest paid on debt by consumers and companies is around £28bn per quarter on a total loan balance of around £1.9 trillion.
“£7.5bn would go a long way to providing debt relief for the individuals and businesses that will be unable to make interest payments over the next three to six months, cancellation of share buybacks and banker bonuses would go even further.”