UK banking sector makes positive moves

According to Justin Cooper, chief executive officer of Capita Registrars, the UK’s banking sector makes up £1 in every £11 of all dividends paid by UK companies, but adds: “This is less than half the pre-crisis levels as RBS and Lloyds stopped paying dividends and many other firms like Northern Rock and Alliance & Leicester have been rescued or taken over.

“Lloyds is now set to begin paying an income to its investors again, but it is likely to show a shadow of its former dividend might. In 2008, Lloyds paid £2.3bn in gross dividends. Investors in the government’s imminent sale will receive a fraction of that amount for the next few years.”

Data from The Share Centre’s Profit Watch UK report reveals the banking sector to be one of the poorest performers based on 2012 revenues as a result of weak lending and write downs. Graham Spooner, investment research analyst at The Share Centre, explains: “Once a favourite for income seekers, the sector has seen much of the dividend flow disappear, however there is still an appetite among investors.

“In the past year, there has been a notable improvement in share prices however, investors should be aware this update raises further questions for the sector and further recovery will take time.”

Independent financial services data firm Markit Dividends forecasts 7 per cent growth in dividends paid by FTSE 350 companies in the third quarter of 2013, leading to an anticipated 12-month yield of 4.3 per cent. Markit’s chief economist Chris Williamson, says: “The 7 per cent projected increase compares to a 4 per cent decrease in pay-outs declared during the same period last year. The third quarter of 2011 was inflated by the special dividend announced by Vodafone.”

He adds, however, that while dividend pay-outs are expected to grow, the increases are “likely to lag behind earnings as many companies seek to rebuild the level at which the dividend is covered by earnings”.

Within banking, Markit Dividends expects dividend growth to amount to £1.8bn in the third quarter of 2013, led by HSBC Holdings and Standard Chartered.

HSBC Holdings, the shareholders of which are likely to benefit as a result of a strong dollar (payments are made in dollars), is expected to increase its third quarter dividend payment by 10 per cent, according to Mr Williamson, slightly less than the 11.1 per cent increase seen in the second quarter. Standard Chartered is forecast for an 8 per cent dividend increase in the third quarter of 2013.

Meanwhile, as the government readies the sale of its 32 per cent stake in Lloyds Banking Group, rumours have surfaced among analysts that the company will likely pay out up to 70 per cent of the its earnings in dividends to shareholders.

An announcement of a dividend payment is expected in the full-year results published at the end of 2013, rather than the end of next year as originally thought following an announcement on August 1 that it will initiate discussions with the regulator about restarting its dividend payments. Steve Davies, co-manager of the Jupiter UK Growth fund and manager of the Jupiter Undervalued Assets fund, explains: “This represents the final stage in [Lloyds’] journey back to pre-crisis normality, alongside the gradual sell-down of the government’s stake in the group. It remains the largest holding in both the Jupiter UK Growth fund and the Jupiter Undervalued Assets fund and we remain positive about its prospects.

“With the UK and Irish economies continuing to improve, we see substantial upside for UK banks from here, even after the sharp rally that has taken place in the last 18 months.”

Schroders’ equities manager Jessica Ground agrees that the UK banking sector has come a long way.

“Broadly speaking, the amount of capital that UK banks hold has doubled, and £100bn of new equity has been injected,” she says. “There is a new generation of management who realise that bigger is not better and are focused on cutting costs and returning capital to shareholders rather than making acquisitions. Shareholders are more aware of the need to act on corporate governance concerns before they spiral out of control. Funding models have been diversified and balance sheet liquidity improved. Loan to deposit ratios are lower and there is less reliance on short-term funding, which can dry up alarmingly quickly.”

Before long a healthy UK banking sector will once again reign supreme for income-seeking investors.

Jenny Lowe is features editor at Investment Adviser