Unbankable: Investing in banks no longer pays dividends
May 1, 2020
2 min read
What's going on here?
The Prudential Regulation Authority (PRA), the regulatory arm of the Bank of England, has requested the UK’s biggest lenders suspend payments to investors as part of its measures to combat the economic downturn caused by COVID-19.
What does this mean?
Banks, including HSBC, Standard Chartered, and Barclays, are cancelling their dividends (distribution of profits by a corporation to its shareholders) and will not be launching any share buy-backs (repurchasing of shares by the company that issued them) in 2020. Senior staff members will not be receiving bonuses either. The PRA notes that these measures function as “…extra headroom [to] help the banks support the economy through 2020”.
HSBC was set to pay its shareholders its final interim dividend of US$0.21 per share on April 14th. Likewise, Standard Chartered was poised to payout US$0.20 per share and implement a US$500mil buy-back programme. As news of the cancellation of dividends reached investors, HSBC’s shares fell 9.5% to HKD$35.95 while Standard Chartered dropped to 7.6% to HKD$39.90 and Barclays to 4.6%.
What's the big picture effect?
The drop in share prices indicates the frustration shareholders have towards the cancellation of their dividends. Some argue that by forcing the cancellation of dividends from banks who have the capacity to make ends meet, the PRA is hurting shareholders who rely on this source of income. As such, it can be said that companies have a “moral imperative” to payout dividends. Rather than preserving capital, this move could be seen as damaging investors’ confidence in the economy. With the global economy facing a recession, news of the suspension of such payments has worried investors and small businesses who are already facing financial difficulties.
Nonetheless, the alternative suggests that as the economy continues entering a recession, there will be further pressure on banks to support the economy and absorb massive losses. Ultimately, a board’s duty is to act in the interests of the company, not to a portion of its shareholder base. By preserving their capital, banks are able to carry on making loans. Further, once the crisis passes, banks are able to return dividends and engage in share buybacks once again.
All in all, while it may be difficult to regain investors’ confidence, there is hope that once the full impact of the pandemic is better understood and economic forecasts for global growth become clearer, business will resume to normal.
Report written by Robyn Ma
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