Irish banks’ €400m dividends plans echoed foolhardiness of past

Market Beat: keeping capital for lending is far more important than payouts

A little over four months after Bear Stearns collapsed in March 2008 and Irish banking shares succumbed to what became known as the St Patrick's Day Massacre, AIB thought it was high time for a show of strength.

The bank announced in July that it was not only paying an interim dividend, but increasing it by 10 per cent – to €270 million.

It has gone down as one of the most foolhardy acts by an Irish bank in the lead-up to financial crisis. The cheques went out on September 26th – four days before Irish taxpayers were forced to guarantee the banking system to save it from collapse.

The resulting government rescue bill for AIB alone: €20.8 billion.


The scale and pace of economic contraction seen in Ireland and elsewhere in recent weeks as coronavirus continues its spread globally is unprecedented, forcing governments and central banks to take even bolder steps than when the great financial crisis struck in 2008.

It has also prompted hundreds of companies globally – including a host of Irish names, from hotel group Dalata to insulation giant Kingspan – to pull planned dividends to conserve cash in uncertain times.

Until Friday at least, AIB and Bank of Ireland, were  still on track to pay over €400 million of dividends between them in the coming months. That was before the European Central Bank stepped in to order euro zone banks to freeze dividend payments and share buybacks this year, or at least until October.


The crisis this time around, of course, is not of banks’ making, and lenders hold much higher levels of capital in reserve to protect themselves against shock losses.

And, indeed, the Government, which was in line to receive €180 million of the planned dividends as a result of its stakes in both AIB and Bank of Ireland, needs whatever money it can get its hands on as healthcare and social protection costs soar and income and corporation tax receipts nosedive.

But the banks must sappreciate the sense in abandoning their dividend plans in order to shore up their capital bases to keep lending flowing through the crisis – and ensure there’s no question that they can handle an inevitable surge in bad loans.

The 55 per cent share price slump in Irish financial stocks to pretty distressed valuations so far this year is an indication of what markets fear may be in store.

The country's banking chiefs were relieved last week when the Central Bank allowed them to dip into their rainy-day reserves and ensure they can continue to provide credit to households and businesses.

The Government estimates that the removal of the so-called counter cyclical capital buffer that banks have had to hold since last July, equating to 1 per cent of their risk-weighted assets, would support €13 billion of bank lending.

On that basis, holding back the AIB and Bank of Ireland dividends would underpin over €5 billion of lending.

Even the European Banking Federation, which has fought the corner for banks against the tide of growing regulatory demands in the past decade, has come out in recent days arguing that now is not the time for publicly quoted banks to be handing over cash to their investors.

In a letter to the European Central Bank’s top banking regulator, Andrea Enria, the lobby group said that the banking sector remained “strongly committed” to helping businesses and households cope with the fallout from the crisis and would prioritise having enough money on standby to be able to fund the economy.

“It is the strong view of the European Banking Federation that any decisions by a listed bank to withhold its 2019 dividends at this stage needs to take into account the perception of investors about the solvency of the European banking sector and the expectations of shareholders,” the letter said.


Where 2019 dividend distributions and share buybacks have not yet been voted on by shareholders at annual general meetings (agm), some banks could decide to put all or part of the money into reserves until the impact of the coronavirus, also known as Covid-19, on the economy is clearer, it added. AIB holds its agm at the end of April, while Bank of Ireland’s is scheduled for May 19th.

Banking analysts were also urging caution. While Irish banks hold capital reserves equivalent to 9 per cent of their total assets, compared to the European average of more than 5 per cent, Goodbody Stockbrokers' Eamonn Hughes said on Friday "non-payment would be the prudent course of action given the uncertainties ahead".

Also this week, Davy analysts Diarmaid Sheridan and Stephen Lyons said that although Irish banks remained "strongly capitalised", it remains difficult to properly assess what level of bad loan losses banks face from the coronavirus epidemic.

“In our opinion, it would be pragmatic for banks to suspend forthcoming [ordinary share] dividend payments until greater clarity can be provided,” they said. “Should the impact be lower than currently feared by the market, dividend payments could then be resumed.”

Irish banks have joined peers internationally in offering up to three-month payment breaks for mortgage holders and businesses affected by the disease.

Regulators have given them the nod that these temporary breaks will not push the loans into non-performing territory that forces lenders to set aside provisions for bad loans.


Who now believes the economic crisis will be contained to a three-month blip, followed by a rapid recovery?

Banks may have agreed to provide working capital and additional support to tide businesses over. But some firms will not come through to the other side. Banks playing God at this time, deciding which companies have a prospect of surviving, will do more harm than good, even if they have a fiduciary duty not to lend money recklessly.

The only way to get around that will be for governments to guarantee additional loans and overdrafts banks make, former ECB president Mario Draghi said in an opinion piece in the Financial Times this week.

Is Ireland ready for another snap guarantee scheme?