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After heeding a request from the Bank of England, several of the largest banks in the U.K. have agreed to suspend dividend payments to shareholders in order to preserve cash that might be needed during the coronavirus pandemic.
Banks, including National Westminster Bank, or NatWest, Barclays (BCS), the U.K. arm of Santander (SAN), Lloyds, Royal Bank of Scotland (RBS), HSBC (HSBC) and Standard Chartered, typically pay out billions each year to their shareholders - but now have agreed to cancel or postpone such dividend payments.
Reuters reported that HSBC was the biggest dividend payer in 2019 at $4.2 billion.
Bloomberg said the U.K.'s five largest banks had planned to pay out about $9.3 billion in dividends over the next two months
But now these banks will keep these funds until the end of the year, a step that "should help the banks support the economy through 2020," Bank of England said.
Barclays' shareholders were expecting to receive a payment of more than £1 billion ($1.24 billion) on Friday.
"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, and ensure that Barclays is well placed to continue doing what we can to help through this crisis," said Barclays chairman Nigel Higgins.
He added that scrapping the dividend was a "difficult decision."
In mid-day trading in London on Wednesday, shares of these big banks rang up sharp losses, as much as 9%.
The Prudential Regulation Authority, a unit of the Bank of England, hailed the banks' moves. "Although the decisions... will result in shareholders not receiving dividends, they are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption," the PRA stated.
Stephen Jones, chief executive for U.K. Finance, the trade body for banks and finance companies, and a former chief financial officer at Santander U.K., said banks were mulling the suspension of dividends even before the Bank of England's request.
"It's very prudent for banks to be retaining capital rather than distributing it in the current environment," he said. "It's important that the banks are given as much firepower as they can to support the economy."
Banks face the strong likelihood that many of their loans outstanding will not be paid back, hence the need for a large cash buffer.
However, the PRA assured that banks have a strong enough capital position to weather even a severe recession in the U.K.
Many analysts expect the U.K. to enter into recession this year due to the shutdown of tens of thousands of businesses. Capital Economics forecast a 15% reduction in the U.K.'s economy in the second quarter.
During the 2008 financial crisis, most banks were still paying out dividends before they received huge government bailouts, engendering much criticism and bitterness from the public.
"It makes sense in a time like this to shut off your dividends and preserve your capital. In six months time we'll have a much better idea of what capital looks like," said John Cronin, a banks analyst at Goodbody Stockbrokers of Dublin, Ireland.
Cronin added that dividends and other forms of shareholder payouts will be "socially unacceptable" during the crisis.
The Bank of England also asked banks to refrain from paying bonuses to senior executives, although it's unclear if the banks will obey that request.
Faisal Islam, economics editor at BBC, wrote this was a "significant move" by the commercial banks.
"With some of the payments due to be made in just days, the impact will be felt almost immediately by some shareholders," he wrote. "The logic here is to preserve cash for where it is needed, but the regulator has also been making the point that this crisis is a moment of potential redemption for the sector. The banks have the opportunity to distance themselves from the financial crisis, which they created, to become the economic saviors of the coronavirus crisis. But that depends on them preserving cashflow, overdrafts and funding lines to businesses that will become viable again once the pandemic passes."
But analysts at Jefferies said the decision to scrap dividends has "structurally bearish ramifications" for the banking sector as a whole, including an increase in the cost of equity.
"It is not beyond the wit of man that some banks might need rights issues and all of this uncertainty in our view ultimately weakens prospective investment propositions," Jefferies stated.
Dividends and share buybacks had fueled huge growth in banks in recent years.
On the continent, the European Central Bank already asked European lenders to stop dividend payments and share buybacks until at least October in order to prop up local economies.
A few European banks, including UniCredit of Italy, Societe Generale of France and Dutch banks ING Groep (ING) and ABN AMRO Group, have announced they will temporarily suspend dividends.
But Swiss banks UBS (UBS) and Credit Suisse (CS) both said they will pay out scheduled dividends - defying calls from Switzerland's financial regulator to curb such payouts.
Goldman Sachs analysts said on Tuesday that European banks would preserve €45 billion ($50 billion) in capital if they chose to retain 2019 dividends that have not been paid out yet.
Moreover, some analysts contend that scrapping dividends could actually hurt the economy.
"We note that euro area bank market capitalization fell on [Monday] by the same [amount] as the 30 billion euros 'saved' by its dividend ban on Friday," analysts at Bank of America Merrill Lynch said in a note, referring to the ECB's proposal.
The European Union's banking watchdog, the European Banking Authority, also said banks should be "conservative" in paying executive bonuses but they did not ask to ban such payments entirely.
UniCredit and Spain's BBVA (BBVA) both said their senior management will waive their bonuses for this year.