Covid-19: Volatility returns to markets after UK banks scrap dividends

Volatility returns after worst quarter since 1987

After a small rebound and relative ensuing calm in recent days, European stock returned to volatile conditions on Wednesday, with the FTSE 100 dropping around 4 per cent in early morning trading before plateauing. Banks led the falls after announcing plans to cancel large amounts of dividend payments, under pressure from regulators to protect their levels of capitalisation. Similar moves were seen in the FTSE 250 and European indices, with futures pointing to a 3 per cent slump in the S&P 500, according to the Financial Times. Markets may now begin to diverge on a geographic basis, with some parts of Europe looking to have reached a peak of new cases, while infection continues apace in the US.

UK banks suspend dividend payments

The UK’s biggest banks have scrapped their dividend payments for the rest of the year, following pressure from the central bank to maintain a cash buffer for the coronavirus crisis. A statement from the Prudential Regulation Authority on Tuesday welcomed the decision by the boards of the large banks, stating it was a “sensible precautionary step” given the role the banks played in supporting the wider economy. Deputy governor and chief executive of the PRA, Sam Woods, had previously written to the chief executives of the major banks, asking them to suspend dividends and buybacks on ordinary shares and to cancel payments of any outstanding 2019 dividends. The banks, which include HSBC, Standard Chartered Bank, Barclays, RBS and Lloyds Banking Group, were due to pay out £7.6bn in dividend income to shareholders, according to AJ Bell analysis.

FTSE 350 DB schemes go into accounting surplus

The accounting position of DB pension schemes for FTSE 350 companies moved from a deficit of £68bn in February to a surplus of £10bn in March, according to Mercer’s Pensions Risk Survey data. Liability values fell by £119bn to £795bn in March, while assets decreased by £41bn to £805bn. According to Maria Johannessen, partner and corporate consulting leader at Mercer, this “dramatic fall in liabilities was mainly caused by the significant increase in corporate bond yields”. Such a decrease will affect the pension costs companies recognise in their accounts, but is unlikely to impact the funding measures used by trustees, she added. Charles Cowling, partner at Mercer, explained that the squeeze on interest rates down to record low levels means that “pension liabilities as measured by trustees are increasing just as pension assets are falling”.