Best UK bank dividends

Fourth-quarter results season has thrown up a few pleasant surprises on dividends from the banking sector. It's certainly reassuring that regulators will allow capital distribution from banks boasting strong capital bases and healthy earnings. But the team at Deutsche Bank has some concerns, so has screened the banking sector for quality of capital and risk-weighted asset (RWA) inflation, which could be triggered by potential regulatory changes.

"The outlook of European Banks' dividend payout expectations continue to be overshadowed by regulatory risk creep and a period of uncertainty as the new supervisor, the ECB, settles in," explains Deutsche.

However, the bank says it has found no evidence so far in the reporting season that regulators are hindering dividend payments, just as long as they are underpinned by a lender's earnings power and strong capital base. In fact, UBS and ING have already moved to dividend paying status.

Deutsche sorted banks for each input and took the simple average to rank them under its dividend screening.

Picking through the results, Lloyds Banking features among the best European banks for capital returns - watch Lloyds return to the dividend list when it announces full-year results on Friday.  Barclays, meanwhile, ranks highly for deep value/overpriced conduct risks.

At 77p, Deutsche reckons Lloyds trades on less than 10 times earnings based on estimates as far out as 2017, and a price-to-tangible book value (P/TBV) value of 1.4. It also pencils in a dividend of 1p for 2014, which will have to be announced on Friday if Deutsche is right, rising to 3p for this year, then 5p and 6p. That gives a prospective dividend yield of 3.9% for this year and 6.5% for 2016.

Barclays trades on 10 times 2015 EPS estimates, dropping to 9 next year, and on a forward P/TBV of 0.9. A forward dividend yield of 2.5% for 2015, meanwhile, increases to 3.2% next year.

Deutsche sticks with its target price for Lloyds of 94p, implying 21% upside. It thinks Barclays is worth 295p, a 13% premium to the current price of 261p.

Overall, stocks covered by the broker trade on an average of 12.2 times 2015 estimates for adjusted EPS, and 1.1 times forecast tangible book value, for an estimated 9.5% return on tangible equity (RoTE), reaching 10.5% in 2016.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.