Posted on Jul 23, 2021 at 6:26 PMUpdated on Jul 23, 2021, 6:59 PM
White smoke in Frankfurt. The European Central Bank (ECB), which supervises the main banks in the euro area, formalized on Friday a decision eagerly awaited by the sector: the lifting of the cautionary recommendations that still weighed on the euro area on dividend payments and buybacks. actions by major European banks.
“The ECB has decided today not to extend beyond September 2021 its recommendation to banks to limit dividends,” said the institution at the very end of the day. “Instead, supervisors will review each bank’s capital and distribution plans, as part of the usual supervisory process.” At the same time, it asks establishments to be “careful” in the distribution decisions that they will have to take.
These restrictions were put in place last year, at the height of the pandemic, to ensure that banks keep as much capital as possible in order to cope with an economic shock. Around 30 billion euros had thus been kept, according to the supervisor’s figures, before this ban was relaxed, with the gradual return to normal economic activity.
An advance ruling on the markets
If the announcement came after the close of markets, bank stocks in the euro zone experienced a rather dynamic Friday, the prices of the main European banks rising by 1.2% to 2% depending on the case. Investors had instead fled bank stocks when these bans were imposed before returning quite strongly from early 2021.
The ECB had already hinted at its decision in recent weeks through the voice of Andrea Enria, the head of banking supervision in the euro zone. It comes a few weeks after that of the Fed. At the end of June, following successful stress tests by the large American establishments, the institution had authorized the sector to resume without restrictions their earnings distributions and share buybacks.
Two weeks later, the City followed suit, the Bank of England in turn formally lifting the limits. In addition to improving the health situation, Europe could not remain alone in limiting the payment of results. “The attractiveness of our institutions is at stake in a context of heightened international competition”, declared the Governor of the Banque de France at the end of May.
Since last May, European banks had been able to resume their payments on a limited basis. The rule – which therefore applies until the end of September – is that the dividend paid in 2021 corresponds either to 15% of the cumulative profits of 2019 and 2020, or to 0.2% of the bank’s risk-weighted assets. (RWA), the smaller amount to be withheld. Between May 26 and June 4, all listed French banks were able to reward their shareholders for their patience.
As a rule, the sector pays back half of its results. But banks could make up for the 2020 soft spot by increasing their payout rates in the future. This is what BNP Paribas has suggested in recent months. “The group’s distribution policy will be reviewed as part of the next 2025 strategic plan,” the leading bank in the euro zone has already indicated by its stock market valuation.
Banks at the foot of the wall
Last month Citi analysts estimated at “50 billion euros per year in 2021 and 2022, or a payout rate of 55-60%”, the amounts that could be paid in Europe.
The ECB’s announcement comes a few days before the opening of the earnings season by European banks. They will therefore be very logically watched on their announcements in terms of payment, now that the ECB has lifted its recommendation.