By Sinead Cruise
LONDON (Reuters) - HSBC (L:HSBA) shareholders face a future of paltry payouts when regulators restore its powers to pay dividends as the bank's bosses press on with a costly revamp against a backdrop of a global recession and the threat of negative interest rates.
One of the banking sector's most reliable dividends could be slashed by as much as 50%, analysts and investors say, with HSBC's management expected to use the economic uncertainty to downgrade shareholder expectations.
Chief Executive Noel Quinn also faces pressure to keep lending to struggling households and businesses while keeping capital in reserve to pay for the bank's overhaul and cover any bad debts if non-performing loans spike.
In August, Europe's biggest bank by assets, warned that its bad debt charges for the year could hit $13 billion as the coronavirus pandemic hammered both its retail and corporate customers worldwide.
"Certainly in this climate it gives them a chance to reset," said Hugh Young, managing director, Asia Pacific, Aberdeen Standard Investments, one of HSBC's 10 largest shareholders. "They can blame, with a degree of reason, both COVID and government."
HSBC declined to comment.
The bank, which derives the majority of its profits from Asia, has not paid an annual dividend below 35 cents since 2009.
Between 2008 and 2018, it paid an average 47.2 cents but analyst forecasts supplied by Refinitiv suggest its annual dividend will plunge to 15 cents in 2020, before recovering to 29 cents in 2021 and 37 cents in 2022.
Will Howlett, equity research analyst at HSBC shareholder Quilter Cheviot, said earnings and cash flow for banks would remain under pressure until at least 2023, when the U.S. Federal Reserve signalled it might be ready to raise rates.
"We see this as a longer lasting headwind than elevated loan losses as a result of the recession caused by lockdowns to control the spread of the virus," he said.
"In this context, we would expect a significant rebasing of (HSBC's) dividend ... based on consensus, we see risks to the downside particularly if HSBC wants to retain a larger budget for a more radical restructuring at full-year results."
Interactive version of below chart:https://tmsnrt.rs/33xIew1
(Graphic: HSBC's dividend per share - https://graphics.reuters.com/HSBC-HLDG/DIVIDEND/bdwvkkbxlvm/chart.png)
DIVIDEND DISCRETION?
On March 31, as lockdowns stalled economic activity globally, HSBC scrapped its fourth interim payout for 2019 after the Bank of England blocked all big lenders from paying dividends or buying back shares in 2020 to conserve capital.
The announcement came just after HSBC said it was targeting $4.5 billion in cost cuts in an overhaul that could see up to 35,000 jobs culled.
HSBC's dividend suspension infuriated its many small shareholders in Hong Kong, who have long benefited from its steady payouts. It left HSBC's total payout for 2019 after the first three payments at 30 cents.
Banks are largely expecting to resume dividends in 2021 but it is unclear whether they will have full discretion over the size of those distributions.
HSBC has said it will review its dividend policy later this year. It is due to release third-quarter results on Oct. 27.
Net interest margins for British banks have plunged after a series of policy rate cuts and weaker demand for loans has more than offset the benefits of cheaper funding costs.
Rules forcing lenders to segregate their retail banks from other divisions also mean HSBC can only channel its large volume of British customer deposits into loans in the country, rather than in more profitable markets across Asia.
Jupiter Asset Management (L:JUP) head of strategy, UK Alpha, Richard Buxton, cited "a rather underwhelming" strategic review as a key reason behind his decision to sell HSBC shares in April after more than a decade of regular ownership.
He used some of the proceeds to top up holdings in rivals Lloyds Banking Group (L:LLOY) and Barclays (L:BARC), which he said have better strategies to cope with future revenue challenges, and where dividend prospects are stronger.
"Things have got tougher for all banks but turning HSBC around involves far more hard graft than I had anticipated, for a prize of a pretty modest return," Buxton said.