Fund managers and banking analysts today reacted with dismay to the Treasury's plans to control how much banks pay out in dividends if they take up any of the Government's £50 billion recapitalisation offer.

The big four banks which are seen as most likely to use the Government's offer are Royal Bank of Scotland, HBOS, Lloyds TSB and Barclays. Between them they paid a total of £9.5 billion in dividends in the last year, although in most cases their shareholders had already been warned to expect less this year.

However, analyst Alex Potter of Collins Stewart today warned investors that “payouts for the main four domestic UK banks will be severely impacted with the possibility of no cash payout until 2010 or later”.

RBS and HBOS, both of whom launched rights issues earlier this year, had already said they would pay share dividends for the first half of this year to preserve cash.

Today's announcement, though, makes it clear that dividend yields — even at a much lower level — are no longer secure.

In the past the banks have been amongst the highest yielding and generally safest shares on the market. Even ahead of the credit crunch Lloyds TSB, run by Eric Daniels, yielded 9%.
Asset managers who run funds which need income to pay their own investors cannot afford to hold on to shares which are no longer certain to pay dividends. That was seen as the major reason behind the continued collapse in most of the High Street banks share prices today.

Paul Niven, head of asset allocation at F&C Asset Management, which runs £96 billion of funds, said: “The Government has made it plain they if they take a stake in a bank they will have their say on a range issues, not least the dividend policy. We simply don't know at this stage — and we will probably not know for some time to come — the dilutive effect on shareholders or how much dividends will be cut.

“It is plain that the current dividend yields cannot be sustained but how deep the cut in the dividend, or whether they get cut back to zero, we just do not know at present.

“For fund managers the extent of the dividend cut matters but only within the long-term picture.”
Henk Potts of Barclays Wealth Management said: “Today's move is for confidence in the sector as it deals with the fear and uncertainty of recent days. It is good for liquidity as it helps the money markets.

“However, there are clearly long-term implications for the dilutive effects on shareholders and for the banks who are now working in a slower growth environment.

“The boom times have certainly come to an end.”
Robert Talbut, who manages £31 billion at Royal London Asset Management, questioned the lack of specifics of how much money goes to each bank in the plan.

He said: “To say £25 billion is available and it's up to each bank how they will draw it down just isn't credible.”