JP Morgan cuts NatWest to 'neutral' after BoE dividend move

On Thursday evening the BoE's Prudential Regulation Authority said banks could pay dividends for 2020 within limits to prevent their financial positions weakening. The PRA told banks to scrap payouts early in the pandemic.

JP Morgan said the PRA's approach should result in a yield of 2.3% across the UK banks for 2020 but the bank's analysts warned that the outcome for 2021 could be less bountiful than expected. Dividends could be accrued but not paid out before another update in advance of first-half results and a full stress test at the end of 2021, the analysts said.

That scenario would rule out a return to quarterly dividends for HSBC and Lloyds Banking Group in the first quarter and reduce the chance of share buybacks, especially for NatWest.

"Subject to the economic recovery, we expect UK banks can do share buybacks only from 2022," JP Morgan's Khuram Chaudhry said in a note to investors.

With no material upgrade likely for capital return expectations Chaudhry cut his rating on NatWest shares to 'neutral' from 'overweight'. He said NatWest's risk-reward profile was less attractive than Barclays, rated 'overweight', and JP Morgan's preferred pick, and Lloyds, rated 'neutral', whose investment case depends less on capital return.

Chaudhry also said he preferred Standard Chartered alongside Barclays.

"The PRA's approach to restarting dividends strikes a sensible balance on moving away from a blanket ban on distributions towards a conservative framework," Chaudhry said. "We believe that the approach to 2021 dividends could lead to a more conservative outcome than expected."