Will Royal Bank of Scotland Group plc Ever Be Able To Afford A Dividend?

Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) and Lloyds (LSE: LLOY) (NYSE: LYG.US) have both promised that they will restart dividend payments this year. 

However, while Lloyds is rapidly returning to health, RBS is still struggling. As a result, it’s becoming increasingly unlikely that RBS will distribute any profits to investors in the near future. 

Access to payouts

RBS rekindled investor hopes of a renewed dividend payout when it repaid the government’s dividend access share during April.

This share, created as part of RBS’s bail out deal, allows the Treasury to take an enhanced dividend before payouts are made to ordinary shareholders. The existence of this access share had made it prohibitively expensive for the bank to pay dividends.

Ulster Bank

Unfortunately, other events occurring within the RBS empire make it appear as if RBS is in no fit state to even consider returning cash to investors right now. Actually, the bank is still trying to convince investors to give it cash.

In particular, RBS is currently trying to attract new cash into its Irish operation, Ulster Bank. 

Ulster is a problem child for RBS, as the Irish subsidiary has made a loss of £2.5bn over the last two years. Now, RBS is approaching private equity funds, asking them to stump up the cash to boost Ulster Bank’s capital cushion. After a capital infusion, RBS intends to merge Ulster with another Irish bank, most likely Permanent TSB.

A deal structured in this way would partially solve RBS’s Irish problems. What’s more, if the bank’s stake in Ulster fell below 50%, the Irish division would not have to be included in RBS’s accounts.

The capital issue

Another burning issue likely to prevent RBS from paying a dividend is the bank’s lack of capital. 

Indeed, after the profit warning earlier this year, RBS’s Tier One capital ratio is expected to fall between 8.1% and 8.5% by the end of the year.

RBS was targeting a capital ratio of 11% by the end of this year, and while the bank’s capital ratio is above the regulatory minimum of 7%, a ratio below 10% gives investors reason to worry.

Regulators are unlikely to allow RBS to offer a dividend to investors unless the bank can prove that it has adequate capital. 

On the other hand

However, while RBS is unlikely to offer its investors a dividend payout any time soon, Lloyds is making the final preparations to its dividend plans. 

Lloyds is building up its Tier One capital ratio, which stood at 10.7% at the end of the first quarter. It is expected that UK regulators require banks to hold 11% in order to allow dividend payouts.

Nevertheless, before it is allowed to restart payouts, Lloyds must get permission from the Bank of England — it is planning to apply for this permission during the second half of the year.

Hopefully, barring any unforeseen shocks, Lloyds’ dividend payout should be given the go ahead by the BoE.