HSBC topped dividend payments as banks benefitted from higher interest rates

In 2023, UK banks dominated dividend payments, handing out £13.8 billion to shareholders – more than any other sector, according to new research by global financial services firm Computershare. This payout was nearly a third higher than the previous year and marked the first time since 2007 that banks had become the country’s largest dividend payers, surpassing all other sectors.

HSBC led the charge, with the bank reinstating its quarterly dividends after the pandemic and tripling profits during the first quarter of the year. Other major UK lenders, such as Lloyds and NatWest, also saw significant profit growth as they benefited from the higher interest rates imposed to curb inflation. These rate hikes helped increase banks’ net interest margins, the difference between what they pay on deposits and what they earn from loans, enabling them to pass on larger returns to shareholders.

While banks’ substantial payouts came amid rising financial pressure on households – facing higher living costs, elevated mortgage rates, and inflation – the sector’s performance was in stark contrast to that of the wider economy. Mark Cleland, head of UK issuer services at Computershare, highlighted the shift in fortunes for banks after years of low interest rates, stating, “Thirteen years of rock-bottom interest rates made it very hard for the sector to make profits, but the need to quell inflation with higher interest rates means the last two years have delivered a dramatic turnaround.”

Overall, UK-listed companies paid out £90.5 billion in dividends across all sectors, with £88.5 billion of that from regular dividends. This marked a 5.4% increase from the previous year. Despite concerns over inflation and the financial pressures faced by households, Cleland noted the increase in banking dividends was “remarkable” and predicted even larger payouts in 2024.

The banking sector’s dividend growth came at a time of heightened scrutiny following the collapse of US-based Silicon Valley Bank and European banking giant Credit Suisse. UK regulators, including the Bank of England, sought to reassure investors and customers that the UK banking sector remained “resilient” and distinct from the struggling international banks.

In contrast, the oil sector also saw a boost in dividends, with Shell, the second-highest UK dividend payer, contributing to a 16% increase in payouts from the energy sector. Together, the top five UK companies – HSBC, Shell, Glencore, British American Tobacco, and Rio Tinto – accounted for more than 31% of all UK dividend payments in 2023.

Looking ahead, Computershare forecasts that regular dividend payouts in 2024 will rise by 2%, reaching £89.8 billion, as higher interest rates continue to impact the economy, particularly the banking sector, which is expected to maintain its position as the largest dividend payer.