By Pietro Lombardi

 

Shares in European banks plunged Monday after the Eurozone's central bank asked the region's lenders not to pay dividends or buy back shares during the coronavirus pandemic.

The European Central Bank wants banks to boost their ability to absorb losses and support the economy as the region braces for a sharp economic slowdown caused by the pandemic. On Friday, it asked banks not to pay dividends for 2019 and 2020 at least until Oct. 1, adding that lenders should also avoid buybacks.

"The ECB expects banks' shareholders to join this collective effort," it said.

Shares in European banks traded sharply lower in morning trade. BNP Paribas SA and Banco Santander SA, among the Eurozone's largest banks, fell 6% and 4.3% respectively, while Italy's biggest banks, UniCredit SpA and Intesa Sanpaolo SpA, were down 5.5% and 4.3%.

"European bank balance sheets are already feeling the strain of the economic impact of the current outbreak," Michael Hewson of CMC Markets UK said.

Some banks, like Italy's UniCredit and Dutch bank ING Groep NV have already taken steps to follow the ECB recommendation.

Other are expected to follow suit.

Analysts at Citi said they expect French banks, as well as other Italian banks, to suspend dividend payments.

Monday's sell-off adds to the pain of European banks, which have fallen sharply so far this year. Since the 2008 financial crisis, European banks have strengthened their position, raising capital and cleaning-up loan books. However, the economic fallout from the current crisis will eat into their capital buffers, with significant uncertainty over the pandemic bill making things worse. The coronavirus pandemic has caused widespread economic shutdown as authorities across the region try to contain the virus. Some of Europe's largest economies, like Italy and Spain--which have the world's highest and second-highest death tolls--are under lockdown, and businesses across industries are struggling.

"Capital conserved by refraining from dividend distributions and share buy-backs can also be used to support households, small businesses and corporate borrowers and/or to absorb losses on existing exposures to such borrowers," the ECB said.

 

Write to Pietro Lombardi at pietro.lombardi@dowjones.com

 

(END) Dow Jones Newswires

March 30, 2020 05:25 ET (09:25 GMT)

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