Yields will level off for shareholders of European banks

Posted on Dec. 2020 at 7:12

Dividends or no dividends? The big banks and the investors remained at best discreet or skeptical two weeks after the last communication of the European banking policeman.

On December 15, the European Central Bank (ECB) lifted its recommendation for a complete freeze on bank dividends, but demanded, among other conditions, that they do not exceed 15% of cumulative results between 2019 and 2020 and that they will not be paid until next September.

Lorenzo Bini Smaghi, chairman of the board of directors of Societe Generale, is one of the few industry leaders to comment on the ECB’s decision. This marks a ” first step “, but there is “There really is no reason for Europe to treat investors differently” than other geographies, he said in an interview on Bloomberg TV on Dec. 17.

Nothing to write home about for shareholders

Markets expect ECB to line up with other regulators, he says “Within a few months”, suggesting hollow that Europe would have been tougher than the Bank of England in particular, which authorizes banks to distribute up to 25% of their cumulative results in 2019-2020.

In other banks, it’s radio silence, or almost. Some made it clear during the third quarter results last November that they would be able to pay dividends next year. But it was indicative and before the ECB announcements.

In the meantime, analysts are making initial projections, which are all the more complex as they are by definition based on an estimate of the 2020 results, which have not yet been decided.

Their conclusions are not exciting for shareholders with, according to UBS, a 2020 return on banking stocks which should be around 2% next year, while – excluding restrictions – it could have been 3.5% .

Logically, it is the best students in the class – the banks with the most results and with the most generous distribution policies – who will see their returns suffer the most.

According to UBS estimates, the yield of the BNP Paribas share would drop from 5.6% (excluding restrictions and on the basis of the estimated result for 2020) to 2.5%, that of the ING share from 5.8%. at 2% and that of Intesa from 6.6% to 1.7%. The variations are also significant for Crédit Agricole SA and the Belgian KBC. The performance of several Nordic banks, including Nordea, would be virtually wiped out.

The debate could go on

What further distracts investors from the banking sector? Not necessarily. The markets have certainly reacted badly to the restrictions of December 15, but the Euro STOXX Banks index has regained half of the ground lost since February. Since January 1, it has fallen by 22.4%, against 6.4% for the CAC 40.

Basically, a lively debate opposes those who fear that we will give back the banks “Incredibly unattractive in terms of capital, which could hurt them in the long run”, according to an American asset manager quoted this week in the “Financial Times”. And the banking authorities, for whom the maintenance of the least euro of reserve is an elementary measure of prudence and a way to avoid a possible “credit crunch” if the health crisis played the extensions.

The ECB’s decision does not necessarily mark the end of the story. If, in the event of a third confinement, unpaid bills and the cost of risk were to soar, beyond the provisions already passed this year by the banks, the debate would return to the table. In mid-December, the European Banking Authority (EBA) called on banks to prepare for the worst.

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