HSBC, Standard Chartered likely to resume dividends next year after UK regulator gives OK

Prudential Regulation Authority asked HSBC, Standard Chartered to suspend dividends, buyouts earlier this year
Dividend suspension sparked a rebellion among shareholders; stock prices have recovered recently

Banking & finance

Chad Bray

Published: 9:03am, 11 Dec 2020

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HSBC and Standard Chartered could restart their dividends as soon as early next year after their chief financial regulator in the United Kingdom said it felt comfortable with the country’s biggest lenders resuming payouts as economies continue to recover from the fallout of the coronavirus pandemic.

The announcement sent the shares of both banks higher early in Hong Kong’s trading session on Friday, but their shares gave up much of their gains over the course of the day. HSBC’s shares declined 0.6 per cent to close at HK$41.65 (US$5.37), while Standard Chartered’s shares rose 0.2 per cent to end the day at HK$49.

The banks, which are based in London, but generate much of their revenue in Asia, were among six UK lenders who agreed earlier this year to cancel their final 2019 payments and suspend further dividends and share buy-backs this year as part of a coordinated response following a request by the Prudential Regulation Authority (PRA), a regulatory arm of the Bank of England.

While economic uncertainty as a result of the pandemic remains “high” and banks in the UK are likely to face “some headwinds” in their capital positions next year, the PRA said it believes lenders remain well capitalised and able to support the economy.

“Weighing those considerations, and consistent with the PRA’s view that distributions are an important and necessary part of the functioning of the banking system, the PRA judges that an extension of the exceptional and precautionary action taken in March is not necessary and that there is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework,” the PRA said in a statement early on Thursday.

02:02

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The move to suspend payouts sparked a rebellion among the Hong Kong shareholder bases for both HSBC and Standard Chartered with some investors calling for the lenders to ditch their London headquarters in favour of Hong Kong.

HSBC, which moved its headquarters to London following its acquisition of Midlands Bank in 1992, has previously said it would not consider moving its headquarters after reviewing its domicile four years ago.

Both banks saw their shares hit hard by investors following the cancellation of their final 2019 dividends and suspensions of further payouts this year, with HSBC hitting a 25-year low in September.

Concerns among investors also were high earlier this year as both lenders were forced to set aside billions of dollars in reserves for potential soured loans as the pandemic weighed on economies stretching from Hong Kong to London to New York.

Those worries have subsided somewhat in recent weeks as Asian economies, particularly in China, appear to be recovering at a quicker pace than their Western counterparts and positive news emerged on the roll-out of a coronavirus vaccine.

China is the only major economy expected to grow this year, according to the latest forecast from the International Monetary Fund, which is predicting a “long, uneven, and uncertain” global recovery. However, Hong Kong, the biggest market for both HSBC and Standard Chartered, is in the throes of the “fourth wave” of the outbreak.

“We welcome this decision by the PRA,” Standard Chartered said in a statement. “Given our strong capital position the board will consider resuming shareholder returns on 25 February 2021 when we release our full-year 2020 results.”

As of Thursday’s close, HSBC’s shares recovered nearly all of their losses since April 1, when the dividend suspension was announced, and Standard Chartered’s shares are trading above their late March levels.

HSBC has said it expects to pay a “conservative” dividend for 2020 depending on market conditions. Photo: Xiaomei Chen

Both banks could see a more than 20 per cent upside in their stocks if they are able to return to paying dividends in 2022 that are in line with their average between 2014 and 2018, Goldman Sachs said in a research note last week.

For now, HSBC and Standard Chartered have said they would consider restarting dividends when they report their full-year results in February, depending on their performance to finish the year and the economic outlook. HSBC has said any payouts would be “conservative”, with an eye to increasing them in the future.

The banks reported better-than-expected earnings in the third quarter, with HSBC saying it now expects to take provisions for bad loans at the “lower-end” of a range of US$8 billion to US$13 billion that it forecast in August.

The PRA said any decision on the appropriate levels of distributions remains up to the bank boards, but the regulator asked banks to operate within a framework of “temporary guardrails” for 2020.

The regulator said that distributions to shareholders should not exceed 20 basis points of risk-weighted assets at the end of the year or 25 per cent of cumulative profits for all of 2019 and 2020 after deducting prior shareholder payouts.

It also asked that banks “exercise a high degree of caution and prudence” in determining the size of any cash bonuses to senior staff after requesting earlier this year that banks not pay cash bonuses to senior executives and material risk takers.

“Any distributions should be prudent, reflecting the still elevated levels of economic uncertainty and the need for banks to continue to support households and businesses through the continuing economic disruption, even in the event that this disruption is more prolonged and severe than currently anticipated,” the regulator said.

This article appeared in the South China Morning Post print edition as: Banks likely to resume paying dividends after UK regulator gives OK

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