Bank rescue raises fears for UK equity income

The government\'s £50 billion recapitalisation scheme of British banks could have adverse effects on UK equity income funds.

The government’s £50 billion recapitalisation scheme of British banks could have adverse effects on UK equity income funds.

While the funds industry last week welcomed the government’s fiscal package, which is being termed “part nationalisation”, Jeremy Lang, manager of Liontrust First Income, says the repercussions for funds that invest in them is unclear.

Six banks – Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland (RBS) and Standard Chartered – and one building society – Nationwide – have stated they are looking at participating in the £50 billion recapitalisation scheme.

The government will take stakes in banks that take part via the use of preference shares. As these shares rank higher than ordinary shares, it constrains the banks’ ability to increase cash dividends. “I am worried about the dividend paying ability of any bank ensnared in the rescue package,” says Lang.

“I suspect any participating bank will be stopped from paying dividends until the government is off its shareholder register.”

However, Julian Cane, manager of the F&C Equity Income fund, says the extent to which they use it will differ.

Increasing pressure on corporate profitability and the need to preserve cash has already resulted in companies outside the banking sector starting to either cut dividends, or omit to pay them altogether.

If several banks also stop paying out, the asset pool for equity income managers will shrink even further. Cane, however, thinks there could be some “wiggle room”.