The Bank of England has ditched pandemic curbs on lender dividend payouts, but said the sector will need to continue helping households and businesses as coronavirus support measures come to an end.
In its latest Financial Stability Report, the Bank said while the UK economic outlook has improved thanks to the rapid vaccination rollout, risks remain to the recovery and it cautioned over soaring small business debt levels.
It said UK lenders are “resilient” in the interim result of its recent health check of the sector, but stressed they will need to provide ongoing support to the economy, with the furlough scheme ending in September and emergency business loans becoming due.
Bank governor Andrew Bailey said lenders were well positioned to provide this support, as the pandemic proved to be the first big test of their resilience and effectiveness of rules since the financial crisis, with “encouraging” results.
In a sign of the balance sheet strength among lenders, the Bank announced that the final so-called “guardrail” limitations on dividend payouts to investors have been scrapped.
It had halted dividends in the sector in March last year when the pandemic struck, but said in December that banks could pay limited dividends.
The Financial Policy Committee (FPC) said those limits were “no longer necessary” as it handed back dividend decisions to bank boards, sending shares higher among listed lending giants.
Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming monthsBank of England
Lloyds Banking Group shares rose nearly 2%, while NatWest, HSBC and Standard Chartered increased almost 1% as investors welcomed the news.
But the FPC, which monitors risks to financial stability, cautioned over debts built up in the pandemic among small businesses.
The report showed that debt levels of small businesses have soared by about 25% since the end of 2019 as firms have tapped Government emergency loans.
This could lead to rising company failures as support schemes end and loans become due, the Bank warned.
It cautioned that in hard-hit sectors such as hospitality, 11.8% of small firms were already behind on their loan repayments or had formally defaulted as of January.
The Bank of England said: “Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming months.”
Mr Bailey added it would be in banks’ collective interest to “provide that support”, with their results and resilience so closely linked to the fortunes of the economy.
The Bank said house price growth had hit its highest level in a decade and noted that households debt burdens had increased slightly, though they remained “significantly below” pre-financial crisis.
But the Bank stressed the “full effect” of the pandemic on households’ finances will become clearer as the economy recovers and broader Government support for household income unwinds fully”.
The twice-yearly report also highlighted concerns over increased signs of “risk raking” behaviour in global financial markets and the surging prices of risky assets, such as high-yielding corporate bonds.
It said there was the risk of a “sharp correction” in these areas, which could lead to interest rate hikes, putting household and business finances under pressure.
Mr Bailey also took the opportunity to send out a warning shot amid a spate of private equity deals, with supermarket Morrisons the latest to agree to a proposed buyout.
He said: “Companies that increase their leverage beyond levels that are safe and sustainable are of course in a much less resilient position when a shock comes along and we’ve had a very big one.
“And so I think that the very clear message should be to companies: Leverage matters.”