Europe's Banks Urged to Cut Dividends to Shore Up Capital
March 31 2020 - 10:22AM
Dow Jones News
By Margot Patrick
European banks are shoring up capital by canceling or delaying
dividend payments, amid concern about their ability to absorb a
potential rush of bad loans as households and companies feel the
pinch of the coronavirus epidemic.
Central banks and regulators started ordering curbs on dividends
last week, sending some European bank shares diving as shareholders
factored in the lost income and considered a worsening outlook for
the sector. Dividends and share buybacks have been a main driver of
banking stocks across the region in recent years.
Italy's UniCredit SpA and Dutch banks ING Groep and ABN AMRO
Group NV are among those that have announced dividend
suspensions.
Authorities have loosened bank capital rules to encourage
lending and help banks respond to stresses that many have never
experienced before. Analysts say it was inevitable policymakers
would want banks to reduce or delay dividends, buybacks and
employee bonuses in case further backstops are needed.
"It makes sense in a time like this to shut off your dividends
and preserve your capital. In six months time we'll have a much
better idea of what capital looks like," said John Cronin, an
analyst at Goodbody Stockbrokers. He predicts dividends and other
shareholder payouts will become "socially unacceptable" until the
full extent of the crisis is known.
On Friday, the European Central Bank said 2020 dividends and
those still due to be paid for 2019 shouldn't be paid until at
least October, to help banks "support households, small businesses
and corporate borrowers and/or to absorb losses on existing
exposures to such borrowers." Share buybacks are also off the
table. The aim is to "keep precious capital resources within the
banking system in these difficult times," Andre Enria, chair of the
supervisory board of the European Central Bank wrote in a blog post
Friday.
Switzerland's financial regulator urged dividend curbs last
week, and the Bank of England is expected to toughen guidance
shortly.
"Acting to preserve strength is not a sign of weakness," the
Swiss regulator said.
In the U.S., a group of the largest banks have said they would
suspend share buybacks but are expected to pay previously-announced
dividends. Some European banks, including the U.K.'s HSBC Holdings
PLC and Switzerland's Credit Suisse Group AG and UBS Group AG have
indicated they will pay out 2019 dividends as planned.
The issue is less acute for U.S. banks since their relatively
strong earnings means they have been accruing capital at a faster
rate. In contrast, many European banks have been undergoing
restructuring that consumed capital.
European banks would preserve EUR45 billion in capital by
retaining 2019 dividends not paid yet, Goldman Sachs analysts
calculated in a note Tuesday.
They recommend investing in large, well-capitalized banks that
had previously been seen as likely to make bigger payouts to
shareholders with their excess capital. Now the focus is on
capital's primary purpose is as a loss-absorbing buffer, they
said.
"The capital is still there. Its relevance to shareholders,
however, has shifted," the analysts said.
Write to Margot Patrick at margot.patrick@wsj.com
(END) Dow Jones Newswires
March 31, 2020 10:07 ET (14:07 GMT)
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