Analyst Note| Niklas Kammer, CFA |
Regulators at the Bank of England have eased capital distribution restrictions for the large U.K. banks under our coverage, allowing for the resumption of dividends, albeit at a reduced rate. Under the new guidelines, banks can distribute up to the higher of 20 basis points of risk-weighted assets as of 2020 year-end or 25% of cumulative 2019 and 2020 profits. Based on our estimates, this translates to a maximum distributable amount for Barclays, Lloyds, and NatWest of about GBP 800 million, GBP 790 million, and GBP 560 million, respectively, and a slightly above 3% yield at current market capitalizations. Crucially, the banks have the capacity to pay the maximum allowed and more. Using pre-COVID-19 minimum capital requirements as a yardstick and excluding all COVID-related transitional arrangements, the U.K. banks have GBP 3 billion (Barclays), GBP 3.7 billion (Lloyds), and GBP 11.1 billion (NatWest) in excess capital on hand. In 2021, U.K. banks will return to the standard distribution process based on the Basel framework allowing for dividends if capital levels permit. We maintain our fair value estimates and moat ratings for all three U.K. banks.