Low rates and lending slump threaten HSBC's long-term dividend ambitions

With the Sinead Cruise
LONDON (Reuters) - HSBC <HSBA.L> shareholders face a future of paltry payouts as regulators restore their powers to pay dividends while the bank's bosses face a costly one amid a global recession and the threat of negative interest rates Make revision.
According to analysts and investors, one of the banking sector's most reliable dividends could be cut by as much as 50%. HSBC management is expected to use economic uncertainty to lower shareholder expectations.
CEO Noel Quinn is also under pressure to keep lending to households and businesses while keeping capital in reserve to fund the bank's overhaul and cover any bad debts should bad loans spike.
In August, Europe's largest bank by asset warned that bad debts could hit $ 13 billion for the year as the coronavirus pandemic hit both retail and corporate customers worldwide.
"In this climate, you certainly have a chance to sit back," said Hugh Young, general manager of Aberdeen Standard Investments in the Asia-Pacific region, one of HSBC's ten largest shareholders. "You can blame both COVID and the government with a reason."
HSBC declined to comment.
The bank, which gets most of its profits from Asia, hasn't paid an annual dividend below 35 cents since 2009.
Between 2008 and 2018, the company paid an average of 47.2 cents. However, the analyst forecasts presented by Refinitiv assume that the annual dividend will fall to 15 cents in 2020 before recovering to 29 cents in 2021 and 37 cents in 2022.
Will Howlett, stock analyst at HSBC shareholder Quilter Cheviot, said earnings and cash flow for banks would remain under pressure until at least 2023 when the US Federal Reserve signaled that it might be ready to hike rates.
"We see this as a prolonged headwind as increased credit losses as a result of the recession caused by lockdowns to control the spread of the virus," he said.
"In that regard, we would expect a significant dividend realignment (HSBC). Based on the consensus, we see downside risks, particularly if HSBC wishes to maintain a larger budget for a more radical year-end reorganization."
Interactive version of the following diagram: https: //tmsnrt.rs/33xIew1

(Graphic: dividend per share from HSBC - https://graphics.reuters.com/HSBC-HLDG/DIVIDEND/bdwvkkbxlvm/chart.png)

On March 31, as lockdowns brought economic activity to a halt around the world, HSBC scrapped its fourth interim payout for 2019 after the Bank of England blocked all major lenders from paying dividends or buying back shares in 2020 to save capital.
The announcement came immediately after HSBC announced plans to cut costs by $ 4.5 billion on an overhaul that could cut up to 35,000 jobs.
The suspension of HSBC's dividends enraged Hong Kong's many small shareholders who have long benefited from the steady payouts. After the first three payments, HSBC's total payout for 2019 was 30 cents.
For the most part, the banks are expecting dividends to resume in 2021, but it is unclear whether they can fully decide on the size of these distributions.
HSBC has announced that it will review its dividend policy later this year. The results of the third quarter are to be published on October 27th.
UK banks' net interest margins have fallen after a series of key rate cuts, and weaker demand for credit has more than offset the benefits of cheaper borrowing costs.
Due to regulations forcing lenders to segregate their retail banks from other businesses, HSBC can only convert its large volume of UK customer deposits into loans in the country rather than into more profitable markets across Asia.
Richard Buxton, head of strategy for Jupiter Asset Management <JUP.L>, UK Alpha, cited "a rather overwhelming" strategic review as the main driver behind his decision to sell HSBC shares in April after more than a decade of regular ownership.
He used a portion of the proceeds to increase stakes in rivals Lloyds Banking Group <LLOY.L> and Barclays <BARC.L>, which he believes have better strategies for meeting future revenue challenges and which have better dividend prospects.
"It's gotten tougher for all banks, but flipping HSBC is far more difficult than I expected to get a price for a fairly modest return," said Buxton.

(Reporting by Sinead Cruise; Editing by David Clarke)

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