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When Antony Jenkins, Barclays chief executive, unveiled his long-awaited “Transform” plan a couple of weeks ago, there were no great surprises in the restructuring he outlined for the bank – the job losses, the cost cuts and the business unit retrenchments had all been pretty well signalled in previous months.
And yet Barclays’ share price leapt 9 per cent on the day. There could be only one explanation. Alongside his overhaul, Mr Jenkins had promised that the bank would pay out 30 per cent of its earnings in dividends, compared with a previous target of 20 to 25 per cent – and, in the interim, distribute 19 per cent of “underlying” earnings for 2012, despite being lossmaking in real terms.
At a time when investors are finding it hard to generate a decent yield on so many of their holdings, they are seizing on signs that banks – many of them laid low by the financial crisis for the past five years – may be back on the dividend trail.
This dividend kicker to share prices has rounded off a great 12 months for bank stocks, with the likes of Lloyds Banking Group in the UK and Bank of America in the US leading a rebound as existential fears – about everything from the eurozone to the mortgage market – have abated.
Anecdotal evidence suggests that at least some of the Barclays share price rise was due to investors who do not normally specialise in the financial sector being drawn to the stock as a value play.
Barclays is not alone. When Swedbank, one of Sweden’s biggest banks, raised its payout ratio from 50 per cent of earnings to an unprecedented 75 per cent last month, its share price jumped more than 10 per cent on the day.
A handful of other European banks, including France’s BNP Paribas and Switzerland’s UBS, have announced higher dividends, too, albeit in more modest scale, while a third group, embracing the likes of Deutsche Bank, have signalled a willingness to increase future payouts.
There is also a fourth bracket of banks – bailed-out institutions such as Lloyds and Royal Bank of Scotland in the UK, KBC in Belgium and Commerzbank in Germany – that would like to restart stalled dividends in the next year or two.
Analysts at Morgan Stanley calculate that, by 2014, 10 banks in Europe should be paying cash dividends that offer a yield on today’s share prices of more than 3.5 per cent. Top of that list is Swedbank on nearly 6 per cent, with domestic rivals Handelsbanken and SEB not far behind. On average, the Swedish banks boast prospective yields that are twice those of Europe’s traditionally big dividend payers: HSBC and Santander.
There are high hopes among US investors, meanwhile, that the Federal Reserve’s annual stress test –the so-called Comprehensive Capital Analysis and Review (CCAR), due in mid-March – will give the green light to US lenders to raise payouts to shareholders, too.
Wells Fargo has already expressed its confidence that it will be able to lift dividends further following the CCAR process. Investors are hopeful that Citigroup and Bank of America, whose payouts were both held back by last year’s CCAR, will be able to press ahead with more aggressive dividend increases.
All of this is, of course, a perfectly natural evolution of the economic cycle. After a bust comes the rebuild of capital – all the more extreme this time round given the toughened Basel III rule book. Then there is the rebuild of profitability – all the slower this time round given the protracted economic recovery.
But ultimately, with capital levels boosted and profits now available for other purposes, dividends are back on the agenda. The shift is being supported by a change in regulators’ view of the world, as pragmatism replaces puritanism. The old stance – boost capital at all costs – has morphed into a more nuanced one, displaying an awareness that without a sustainable dividend policy banks aren’t going to have the investor base to support any future capital raising.
All of which is probably sensible and very welcome for investors. The bad news is that it makes for a fairly damning indictment of future growth prospects.
Any bank that is giving back as much as 75 per cent of profits to shareholders is clearly lacking in opportunities to invest and expand. This means that, once investors have enjoyed the one-off share price rises that have accompanied big dividend rises, the outlook for bank share prices is probably prosaic.
The future of banking may yet be a sector dominated by derisked, big dividend-paying institutions that look just like the utility companies that politicians have long clamoured for.
Patrick Jenkins is the FT’s banking editor
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