The Eurotower in Frankfurt, Germany. Picture: MAX KRAUS/BLOOMBERG
The Eurotower in Frankfurt, Germany. Picture: MAX KRAUS/BLOOMBERG

Brussels — European regulators lifted their de facto ban on bank dividends while imposing strict limits on payout levels to help lenders maintain financial strength during the pandemic.

The European Central Bank (ECB) said   that the continent’s banks should keep dividends and share repurchases to less than 15% of profit for 2019 and 2020, or 0.2% of their key capital ratio, whichever is lower, according to a statement. That’s a more conservative payout level than the Bank of England (BoE) announced last week.

European lenders’ shares have lagged behind the broader market this year, after they repeatedly warned that being unable to return cash to investors risks cutting them off from capital markets. Despite optimism that the end of the pandemic is in sight, some regulators remain concerned that allowing a full return to payouts may leave banks without the financial reserves to bear losses without taxpayer bailouts.

“It’s an important opening,” Andrea Enria, head of the ECB’s supervisory arm, said in a Bloomberg Television interview. “We are moving slowly back to normal, although we are not in normality yet.”

While the economy’s path is clearer, there’s “not a lot of visibility on the asset quality trajectory” at banks, Enria said. Financial institutions are also benefiting from government, central bank and regulatory support, which justifies the ECB’s call for prudence, he said.

Hawkish stance

The cap makes the ECB one of the more hawkish banking watchdogs in Europe. The BoE said last week that it will allow lenders to make payouts that don’t exceed 0.2% their risk-weighted assets, or 25% of cumulative quarterly profits over 2019 and 2020, after deducting shareholder distributions.

The Federal Reserve has barred the biggest US banks from stock buybacks and capped dividend payouts at second-quarter levels through the rest of 2020.

Bloomberg reported last week that European regulators planned to take a more conservative approach than the BOE.

Banks will probably pay out €10bn to €12bn if they stick to the cap, or about one-third of what they would during a normal year, Enria said. “We don’t expect to have to intervene too much,” he said. “Most of the banks have already decided to be moderate.”

The limitations may come as a disappointment to bank investors as some lenders had raised the prospect of higher payouts. France’s BNP Paribas SA said in November that it had set aside funds in line with a policy of paying out 50% of profit. Still, lenders look set to be free to return more money to shareholders in the fourth quarter of next year.

Impatient banks

As the pandemic progressed and banks largely managed to deal with the fallout, some of the hardest-hit by the suspension have become more vocal in demanding a return to payouts. Societe Generale  chair Lorenzo Bini-Smaghi and Banco Santander   counterpart Ana Botin, warned that the ban could backfire by making loans more expensive and even cutting banks off from investor funds.

Enria said he doesn’t think banks in the eurozone will be at a disadvantage compared with peers because of its recommendations. “We intend to repeal this recommendation in September,” he said in the interview. “We are going back to the ordinary situation in which supervisors will vet the dividend payments decisions by banks in the normal supervisory process on a bank specific basis.”

Lenders need to be profitable and have “robust capital trajectories” if they want to return funds to shareholders and will need to contact their regulators “to discuss whether the level of intended distribution is prudent”, the ECB said, without giving more information.

The watchdog also urged banks to adopt “extreme moderation” when setting staff compensation.



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