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UK banks get hiked ahead of sector's dividend 'Freedom Day'

Published: 12:36 07 Jul 2021 BST

Lloyds Banking Group - ATMs
When will banks start to pay out?

Dividend forecasts and price targets for several FTSE 350 banks have been hiked by Goldman Sachs, UBS and other analysts ahead of what should be an eventful few weeks for the sector.

The Bank of England’s Prudential Regulation Authority is expected to lift its cap on bank dividends next week, with the European Central Bank doing the same the week after, opening the way for the sector’s own ‘Freedom Day’ to make payouts to shareholders in the third and fourth quarters respectively.

“We expect the PRA to eliminate dividend curbs on 13 July, paving the way for significant capital returns,” said UBS after upgrading earnings per share estimates for UK banks under its coverage by around 5%, largely driven by lower loan loss predictions.

With the banking sector’s earnings season coming up at the end of July, several brokers were rejigging their forecasts and share price targets.

UBS nudged up its price targets for Barclays PLC (LON:BARC) to 210p from 200p, Lloyds Banking Group PLC (LON:LLOY) to 54p from 51p, and NatWest Group PLC (LON:NWG) to 214p from 205p, but cut Standard Chartered PLC (LON:STAN) to 490p from 530p.

UBS said Barclays PLC (LON:BARC) remained its ‘top pick’ among the big lenders and Virgin Money UK PLC (LON:VMUK) among the challenger banks.

Goldman Sachs, meanwhile, hiked its price target for NatWest to 315p from 310p and HSBC PLC (LON:HSBA) to 600p from 585p.

After a new analysis of capital levels, Citigroup suggested mid-caps OSB Group PLC (LON:OSB) and Close Brothers Group (LON:CBG) have the potential to increase investor pay-outs.

For Berenberg, Barclays was the highlight, with strengthening economic outlook continues to creating more favourable conditions for the blue-eagle bank both in the UK and the US, with its investment bank arm appearing to be gaining further market share and potential for further clarity from management over cost reduction plans. 

Growing piles of excess capital

Second-quarter results are likely to show strength in earnings driven by trading income and loan losses, the UBS analysts said, expecting confirmation of “the start of a strong recovery in activity levels”.

Stabilising credit card balances and strong growth in vehicle finance should be a net positive and, while mortgage spreads are under pressure strong volumes should have completely offset that.

With provisions for bad assets negligible UBS said this “[raises] the probability that UK lenders will find themselves materially overprovided against non-defaulted loans” once the PRA has confirmed the sector’s own ‘Freedom Day’.

“By the time results are declared, we expect the UK regulator to have put bank boards again in charge of capital distributions,” UBS analyst Jason Napier wrote.

“But our forecasts do not assume special dividends or buybacks at 2Q results.

“Though all banks under coverage could afford excess capital distributions, we assume that substantial payouts will wait for FY21 announcements, pending a reduction in mobility restrictions, increased vaccination coverage, an end to furloughs, substantial start to Bounce Back Loan repayments, stress test results and full year audit processes.”

However, just knowing that banks are able, should they wish, to pay out a growing pile of excess capital that stood variously at 6-27% of market cap at the end of the first quarter “should generate broader appeal for the shares, we think”.

Napier and co also reckon UK domestic banks are 14% cheaper on a p/e basis than the Eurobanks, which themselves are 45% cheap to the market.

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