Euro zone banks set to restart dividend payments under strict limits

Europe’s top financial regulators are putting the finishing touches to new recommendations allowing the region’s strongest banks to restart dividend payments within strict limits, ending a nine-month hiatus imposed due to the coronavirus crisis.

The European Central Bank’s supervisory board, which oversees the 117 biggest banks in the euro zone, plans to announce the conditions under which it will accept some lenders restarting their dividend payments after its meeting on Tuesday.

Three people briefed on the discussions said the ECB was preparing to propose stricter limits on banks’ renewed dividend payments than those outlined by the Bank of England, which lifted its ban on shareholder distributions in the sector last week.

The ECB ordered euro zone banks - including Irish lenders - to stop all dividends and share buybacks to conserve €30billion of capital in March, shortly after the pandemic arrived in Europe. Since then, the sector has lobbied hard for stronger banks to be allowed to resume payouts early next year.

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The issue has divided European financial regulators. Some have argued that the banking sector should continue to conserve capital ahead of a potential surge in defaults that is likely when governments wind down their loan guarantees and other policies to shield the economy from the pandemic.

Capital raising

However, banks entered the pandemic with much higher levels of loss-absorbing equity capital than in the 2008 financial crisis, and senior banking executives have warned that the blanket ban on dividends risks backfiring by driving investors away from the sector and reducing its ability to raise fresh capital.

“I think they are looking at the banks as a privileged sector, when it is clearly the opposite if you look at the share prices,” said one bank chairman. “I think it is ideological.” The Euro Stoxx index of banks has fallen 22 per cent this year, underperforming the wider market.

The ECB’s supervisory board is expected to announce that banks can resume dividend payments only if they will be left with enough capital to absorb predicted losses from the impact of coronavirus.

It is expected to set the limit for shareholder distributions below the “guardrails” unveiled by the BoE last week to limit payouts to 25 per cent of a bank’s profits over the previous two years or 0.2 per cent of its risk-weighted assets - whichever is the higher.

“The most likely scenario is to allow some institutions to pay dividends, but only under certain conditions, which will probably be more restrictive than the Bank of England,” said one person briefed on the ECB’s discussions. Euro zone banks were likely to be limited to distributing only between 10 and 20 per cent of their profits, the person added. The ECB declined to comment.

Analysts at Citigroup said the euro zone banks with the highest capital buffers above regulatory minimums included KBC in Belgium and Nordea in Finland.

Both the ECB’s supervisory board - chaired by Andrea Enria - and the European Systemic Risk Board - chaired by ECB president Christine Lagarde - will issue separate recommendations on bank dividends on Tuesday.

Some members of the ECB supervisory board were irritated in July when the ESRB, which oversees the financial system of the EU as a whole and not only the eurozone, was first to publish its recommendation to extend the block on bank dividends until the end of the year.

On Tuesday, the ECB supervisory board will meet first. However, its decision may still be announced second because it will need to be signed off by the ECB’s governing council under the so-called non-objection procedure. However, officials said the institutions shared many members and were in close co-ordination so their decisions were unlikely to differ.

- Copyright The Financial Times Limited 2020