Picture: BLOOMBERG/MATTHEW LLOYD
Picture: BLOOMBERG/MATTHEW LLOYD

Two of Europe’s largest banks signalled a path back to paying dividends after boosting capital and saying loan losses for the year were likely to be lower than expected.

HSBC said it would pay a “conservative dividend” for the year if allowed, after Europe’s largest lender reported higher-than-expected earnings for the third quarter. Banco Santander rebounded from its worst-ever loss with improved capital and an upbeat profit forecast as it seeks to convince regulators that its balance sheet is strong enough to resume dividend payments.

Their optimism during earnings presentations on Tuesday stood in stark contrast to warnings by European governments that renewed lockdowns could become inevitable if they cannot stem the rise in infections. European banking regulators, who had been moving closer to lifting a de-facto dividend ban, are increasingly worried about the worsening economic outlook.

“I am confident that we will be able to resume cash dividends once regulatory conditions allow,” said Santander chair Ana Botin. Santander shareholders voted Tuesday in favor of a payout of 10 euro cents per share on this year’s earnings if the ECB lifts its recommendation. The bank said that decision should come in December.

Shares of both lenders rose, with HSBC jumping more than 7% in early London trading and Santander gaining as much as 5% in Madrid, before paring gains. Both stocks were among the hardest-hit this year among European lenders.

Banks in the region are stepping up pressure on regulators for permission to resume shareholder payouts, which were largely suspended when the pandemic first hit, leading to the selloff in their shares. UBS last week said it would set aside $1.5bn for share buybacks next year as it benefited from a trading rally that has helped banks prepare for the prospect of increased bad loans. Barclays said Friday it will communicate its policy around returning capital to shareholders at its year-end results.

Yet regulators, which only recently had been leaning toward lifting restrictions, are starting to push back, pointing to a surge in new infections. Bank of Spain governor Pablo Hernandez de Cos said last week that what has so far been a health and economic crisis could spill over into the financial sector.

“It is a question of when, not if, banks’ asset quality will deteriorate in this crisis,” he said. “A resurgence in Covid-19 cases coupled with the unwinding of support measures could further magnify the crystallisation of bank losses.”

The uncertain outlook could still sway officials gathered at the European Central Bank toward extending their ban on dividends, people familiar with the matter have said. The Bank of England warned in a September 30 letter of weaknesses in British banks’ ability to estimate loan losses and urged the industry to keep a better watch on the likely surge in defaults during the pandemic.

So far this quarter, Europe’s banks are following the lead of their US peers and are signaling that bad loans may not rise as much as initially feared. HSBC pared back its expected loan losses to the lower end of a previously announced $8bn to $13bn range. Adjusted pretax profit slid 21% to $4.3bn in the period, beating the $2.8bn estimate. The bank also announced more aggressive cost-cutting plans.

HSBC unveiled a sweeping restructuring earlier in 2020, announcing jobs cuts of about 35,000 over the next three years as the lender navigates rising geopolitical tensions in China and Hong Kong, one of the key drivers of its profits. The bank said it would announce a further revision to its overhaul when it reports its full-year figures in 2021, with fresh details of the company’s plans on capital deployment and costs.

Santander held back €2.5bn for loan losses after setting aside €7bn in the first half. The lender, which posted its first loss in 163 years in the second quarter, reported net income of €1.75bn euros for the third, beating estimates of about €1bn. The CET1 ratio, a key measure of capital strength, improved to 11.98% from 11.84% at the end of June. At HSBC, it rose 15.6%, up 0.6%.

Santander generated €500m of savings in the first nine months of the year and expects to reach a medium-term target of €1bn  by the end of 2020, ahead of schedule. It plans to discuss job cuts with unions in the coming days in what would be the first round of workforce reductions by a Spanish bank since the pandemic.

Bloomberg

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