The European Central Bank’s latest recommendation to allow lenders to restart limited dividend payments next year following a nine-month ban has the industry cautiously optimistic about the continental investment outlook.
The ECB’s announcement comes with restrictions, including dividends and share buybacks needing to be below 15% of the combined profits for the past two years or no higher than 0.2% of the common equity tier 1 ratio, depending on which one was lower. The latest recommendation will remain valid until the end of September 2021.
While the decision is considered a recommendation, the ECB stressed it would be closely monitoring to ensure adherence.
“The ECB reiterates its expectation that your institution will continue to adopt extreme moderation with regard to variable remuneration until 30 September 2021, especially for identified staff (so-called ‘material risk takers’), insofar as it may negatively affect the amount or quality of your institution’s total capital,” said Andrea Enria, the ECB’s head of bank supervision, in a letter to the industry.
European banking shares have been subdued in trading on Wednesday, with UniCredit (UCG.MI) down 1.2% at around 2pm in London, Societe Generale (GLE.PA) lower 0.4%, Credit Agricole (ACA.MI) down 0.1% and Nordea (NDA-FI.HE) down 2%.
The ECB’s approach has been harsher than its peers, including the Bank of England announcing last week that it would limit dividend distribution to 25% of 2019 and 2020 profits combined or 0.2% of the bank’s risk-weighted assets, depending on which one was higher.
The Federal Reserve also placed restrictions on the biggest US banks from stock buybacks and capped dividend payouts at second quarter levels through the rest of 2020.
Banks have been lobbying to have the ban lifted, arguing that a bigger payout would increase share prices and make it easier to raise capital if necessary.
Stopping payouts was intended to help preserve bank capital as the pandemic raged, giving European lenders deeper buffers to absorb losses as customers and businesses were faced with job losses and closures in the face of looming restrictions related to the coronavirus pandemic.
Goldman Sachs reacted to the announcement, reminding that it was previously “critical of the process of dividend ban extension” due to the “absence of clarity around factors and the process that would determine the outcome of the next review.”
“Here, the ECB delivered beyond our expectation – an introduction of a hard deadline, set for 30 September, will trigger a near ‘repeal’ of current measures, and a return to a ‘normal supervisory cycle’.
“Whilst we see the yield potential, we also believe that the risk investors attach to European banks dividend yields has increased and it will take time, and consistent implementation of ECB’s outline, to rebuild.”
In terms of stock-specific impacts, Jefferies in a recent analyst note said: “Within the large cap space the best dividend yields in H1-21 will come from French banks,” following the ECB’s announcement. “When comparing the implied dividend for H1-21 to current consensus expectations, a few banks fare better than expected (Sabadell, Natixis & SocGen) but the majority fare worse (Nordea, ISP, KBC, ING),” it added.
Analysts at the Bank of America expressed caution on the industry’s outlook.
“We believe that as Spring 2022 approaches, the focus will increasingly be on the meaningful yields ahead, while the challenges of 2020 fade in the memory,” analysts said. “However, with running cash distributions so low, we believe re-engagement in the sector may well be slow.”
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