Could banking dividends be under threat?
Just yesterday the Bank of England was again suggests that UK banks should increase their capital reserves in readiness for potential problems in the euro zone. This comes on top of plans to increase the safety net between liabilities and assets for the UK banking arena and could in the short-term impact upon dividends for shareholders.
For many years banking shares have been the basis of a very strong dividend income flow and featured very prominently in a number of pension funds. However, if more capital is required to allow UK banks to operate then ultimately it must come from somewhere, something which could be very difficult in the current economic climate. The easiest option would be to reduce dividends, or at least control dividend growth, in the short to medium term in order to maintain a higher capital reserve. Whether this would have any impact upon banking share prices remains to be seen.
As we have mentioned on numerous occasions, the UK banking sector of tomorrow will be very different to the UK banking sector of yesterday and while historically changes have often been reversed in the future, there is a feeling that any changes to the UK banking arena this time round could well stick.
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