A year after the pandemic began, Britain’s banks look in reasonably healthy shape. Their capital buffers exceed their own targets, suggesting the potential for more shareholder handouts to come. When that acceleration begins and how much banks will pay patient shareholders are the two questions holding back their valuations.
On Lex’s estimates, the five largest UK listed banks have more than £32bn of excess capital to distribute. Of this, well over a third sits with one bank, HSBC. Despite this payout potential, all of the UK banks still trade an average of 35 per cent below their respective tangible book values.
Consider Barclays, which reported first-quarter results on Friday. Its £2.3bn of pre-tax profit (adjusted for one-offs) exceeded expectations by nearly a third. Its common equity tier one capital ratio — measuring its balance sheet buffer — of 14.6 per cent means Barclays exceeds its own target by the equivalent of 20 pence per share. Currently the bank expects to deliver just a sixth of that in dividends. Analysts expect only 10p of dividends per share by 2023. Even with share buybacks, that is far below the potential.
Of course, the Bank of England’s Prudential Regulation Authority decides about any distribution of this largesse. In December, the watchdog relaxed its restrictions to the higher of either a quarter of cumulative profits (over two years) or 0.2 per cent of risk-weighted assets. That would still leave shareholders well short of what they might, in principle, receive. Some will argue that government stimulus has created this favourable situation for banks. Yet long-suffering shareholders deserve something more for their support.
With yield curves steepening and the potential for a post-pandemic economic recovery, UK banks have a brighter future. Yet until the PRA releases its reins on the group, markets will only slowly price that optimism into the sector’s shares.
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