“The banking sector bore the brunt of the dividend collapse since the start of the pandemic as the regulator ordered banks to freeze dividends as an insurance policy against spiralling loan losses.
“In December, the PRA gave the banks the option of resuming dividends, but with some very large caveats or ‘guardrails’ in that dividends could not exceed either 20 basis points of risk-weighted assets, or 25% of cumulative eight-quarter profits for 2019 and 2020.
“Now the ‘guardrails’ have been removed the banks face no regulatory barriers to resuming dividends at levels they desire. The ‘guardrails’ were always intended to be a stepping-stone back to normality, but quite what ‘normality’ now looks like is a whole other story.
“While the banks have the green light to resume dividends, it is likely that caution will remain, and indeed guidance encouraged them to do so. While there is more certainty on the economic backdrop versus last December, we are not out of the woods just yet and precisely what happens after ‘freedom day’ remains a big unknown.
“In addition, as the government starts to withdraw its support packages, cracks may begin to show and a number businesses could struggle to find their own feet once again. This could lead to a tick up in defaults that the banks will need to absorb. While the lifting of restrictions is a positive development, the road back to normality could be bumpy. Dividends will remain under scrutiny.”