Shares in the FTSE 350 banking index, which in recent weeks has plumbed multi-decade lows, jumped on press reports that talks were under way with the Prudential Regularity Authority (PRA) to resume dividend payments in 2021.

In March 2020, the regulator asked the banks to suspend dividends and buybacks until the end of the year. In June, it said it would assess firms’ distribution plans from 2021 ‘based on the current and projected capital positions of the banks’, taking into account ‘the level of uncertainty on the future path of the economy, market conditions, and capital trajectories prevailing at that time’.

The question for the PRA today is the same as it was in March, do the banks have enough capital to be able to absorb losses and keep lending? According to Numis analyst Jonathan Pierce, ‘the regulator has had eight months to examine this and all of its analysis suggests the answer is yes’.

Barclays (BARC), the first bank to report third quarter earnings (23 Oct), posted a record Core Tier One equity ratio of 14.6%, well above the PRA’s recommended minimum of 13%, despite a sharp jump in bad loan provisions.

HSBC (HSBA), which scrapped £3.4 billion of planned dividends this year, reported a third quarter Core Tier One ratio of 15.6% and dangled the carrot of a ‘conservative’ 2020 dividend payment early next year subject to regulatory approval (26 Oct).

Before the coronavirus pandemic, the banks were expected to pay out almost £14 billion in dividends on this year’s earnings according to Link Asset Services.

The question for investors is, will pay-outs ever get back to these levels or will the regulator insist on smaller distributions?

Considering that pre-crisis the banks were trading on prospective yields approaching double digits, and in many cases share prices have halved in the interim, it seems highly unlikely that per-share dividends in 2021 will be anywhere close to the former levels. HSBC is effectively saying as much when it describes its potential 2020 pay-out as conservative.

Also, pre-pandemic many UK dividend pay-outs were considered excessively large relative to profits so it’s possible that dividends overall, not just in the banking sector, will be reined in to improve firms’ coverage ratios. The decision by big oil firms Royal Dutch Shell (RDSB) and BP (BP) to drastically reduce their dividends in 2020 points in this direction.

Finally, as Pierce from Numis points out, while banks don’t need fresh equity now, ‘this might not always be the case’. Doling out big dividends and then going back to shareholders for more cash is not going to fly with the regulator.

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