Bank of England keeps Lloyds on tenterhooks over dividend

Bank will have to be absolutely convinced Lloyds is healthy enough

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Lloyds Banking Group has been warned that it could have as little as 48 hours notice of the Bank of England’s decision on whether it will be allowed to pay a dividend for its 2014 financial year.

Lloyds’s attempt to make its first payment since its multibillion-pound bailout during the financial crisis is contingent on the approval of the board of the Prudential Regulation Authority, which oversees the sector’s health as a subsidiary of the Bank of England. While the PRA has already held its fortnightly board meeting, it has the capacity to make such a decision outside its regularly scheduled events and is set to use it for Lloyds. The City is expecting it to approve the payment but Lloyds has been warned that it is by no means a done deal.

One person with knowledge of the situation said: “The Bank is understandably very risk averse, and so it will have to be absolutely convinced that Lloyds is healthy enough to make a payment. On the flip side, they will realise that there is a danger, in saying no, of the market taking fright and wondering what the PRA knows that investors and analysts don’t know.”

Lloyds has sought to bolster its case by pointing to its third-quarter numbers showing what insiders argue is “one of the best capital positions in the sector” with a core tier one capital ratio of 12 per cent and a leverage ratio of 4.7 per cent.

However, it still only scraped through the Bank of England’s stress tests last year, which gauged the ability of major lenders to cope with a sudden, deep recession, featuring a sharp rise in interest rates and unemployment over a three-year period beginning at the end of 2013, combined with a steep fall in house prices.

Such a scenario was always going to be hard for Lloyds given its position as the nation’s biggest lender. A “no” decision on the bank’s dividend – which analysts have been forecasting at just over 1p a share if approved – would come as a devastating blow to the business and test the credibility of its management.

It could also add to the controversy over the bonus paid to the chief executive, Antonio Horta Osorio. A largely share-based payout of up to £9m is due because he has met targets set when he joined the lender. Lloyds, in line with the other banks, has sought to take some of the heat out of the issue by reporting pay details alongside the results and limiting cash payments to just £2,000.

It is thought to have stressed that a dividend at the expected level would have only a very small impact on its capital buffers. A payment would also make it very much easier for the Government to offload the remainder of its stake.

The reporting season kicks off next week with HSBC, which on Monday is expected to reiterate its apology for the activities of its Swiss private banking unit.

Taxpayers will face an extra hit from that through the likely impact on the price the majority Government-owned Royal Bank of Scotland will get from its sell-off of its Swiss private bank, which is part of Coutts International.

In line with Mr Horta Osorio, all of the banking executives are expected to accept their bonuses this year. However, HSBC’s chief executive, Stuart Gulliver, will see his payout cut in recognition of its latest problems, including the £216m fine it received last year from regulators for its role in the foreign exchange rate-rigging scandal.