Shares in UK lenders dropped sharply on Friday after the Bank of England said it saw ‘scope for banks to recommence some distributions should their boards choose to do so’, but set out a more stringent regime than investors had anticipated.

The Prudential Regulatory Authority (PRA) said that, while there remained ‘some headwinds’ to banks capital positions, having carried out two stress tests this year it was confident the sector remained ‘well capitalized and able to support the economy’.

However, it warned boards that pay-outs to shareholders should be ‘prudent, reflecting the still elevated levels of economic uncertainty’, and that banks needed to operate ‘within a framework of temporary guardrails’.

In terms of 2020 results, pay-outs to ordinary shareholders cannot exceed the higher of: 20 basis points or 0.2% of risk-weighted assets as at the year-end; or 25% of the combined profits of 2019 and 2020, excluding any payments already made over the two years.

The PRA said if any firm wanted to make shareholder distributions in excess of the guardrails, ‘it should engage with its supervisors and expect a high bar for justifying any exceptions’.

Shares in NatWest Group (NWG) tumbled 5% to 153p, while Lloyds Banking Group (LLOY) shed 4.3% to 34.1p and Barclays (BARC) lost 4.1% to 136p.

The regulator also set out a framework for a return to more normal dividend payouts next year, although in an unexpected development it ordered the banks to accrue their dividends rather than paying them out, ahead of their half-year results and a mid-year stress test.

According to Link Group, UK dividend payments halved in the third quarter to £18 billion, the lowest total for the period since 2010, as close to two thirds of companies cut or cancelled their pay-outs. Banks accounted for 40% of the cuts after the PRA barred them from paying dividends in March.

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJBell logo

Issue Date: 11 Dec 2020