RE: distribution of surplus capital1 May 2019 21:24
Peachy -
Have you heard the news about Lloyds Banking Group? Jefferies analysts have: “This morning, the PRA announced that LLOY’s Systemic Buffer for the Ring-Fenced Bank (the so-called “D-SIB”) will be 200 bps which = 170 bps at group level. This is below the 210 bps that was included in the group’s capital guidance and leads to a net 30 bps reduction in the group’s Pillar 2A. As a result, the CET1 level targeted by the group falls to circa 12.5 per cent.”
Got that? No? Then allow Lombard to translate: Lloyds’ shareholders are in line for a surprise £1bn payout.
Once you work though the impenetrable language of financial regulation, what is being said by the PRA — the Bank of England’s Prudential Regulation Authority — becomes clearer: it is letting Lloyds hold a lower buffer against future risks, so roughly £1bn of capital is technically surplus to requirements.
And the market thinks that translates to bigger returns for investors. Lloyds’ own interpreter intimated as much: “The group?.?.?.?will continue to give consideration to the distribution of surplus capital to shareholders at the end of the year, while also continuing to look for ways to use its position to benefit our customers.”
Analysts understood who was likely to be prioritised. “There will be a £1bn [one-time] uplift in Lloyds 2020 share buyback capacity, circa 2.25 per cent of market cap. Wonderful news!” said Investec. “This is clearly positive news for investors,” concluded Shore Capital.
But should a change in a regulator’s calculation instantly translate to a shareholder payday? Only the language manglers at Jefferies wrestled with the question: “Will the £1bn be added to excess capital and distributed in the form of a buyback at the end of 2019 or will part of the excess be held aside for regulatory changes coming beyond 2020?” They took but another sentence to conclude it would be the former, given Lloyds’ strong capital generation.
Reading between the lines, Lloyds is of the same view. It publicly declares itself “a stronger and safer bank”. It privately notes it is cutting its capital buffer by only 50 basis points, rather than the full 70 the PRA will allow.
Is everyone convinced by the PRA’s parsing of the situation, though?
Not all policymakers think it a good time to reduce risk buffers. A day before the PRA decision, the Adam Smith Institute think-tank called for higher capital requirements to make banks safer and less prone to causing crashes — and restore public faith. Its senior fellow, professor Kevin Dowd, warned that Britain’s banks are more leveraged now than before the financial crisis — with a market-value leverage ratio that has fallen to 4 per cent from 7 per cent in 2008. He said the “Great Capital Rebuild” the banks claim to have undertaken was “as real as the Wizard of Oz”. He argued that more capital would enable less regulation.
That is a lot easier to understand. But don’t expect it to translate into quite so many City hea
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