ECB to lift ban on eurozone banks’ dividends as economy rebounds

Bloomberg

The European Central Bank (ECB) said it will lift a cap on how much lenders can return to shareholders with dividends and share buybacks, while urging them to remain cautious given uncertainty in pandemic.
The ECB “decided not to extend beyond September 2021 its recommendation that all banks limit dividends,” the central bank said in a statement. “Instead, supervisors will assess the capital and distribution plans of each bank as part of the regular supervisory process.”
With the euro-area economy rebounding as vaccinations increase and businesses reopen, regulators had little choice to remove the restrictions, which had drawn rebukes from top bankers concerned about their stock prices. The ECB’s decision comes after the Bank of England said this month it’s fully removing guardrails that limited
dividends at HSBC Holdings, Barclays, Standard Chartered Plc and other top lenders.
“The latest macroeconomic projections confirm the economic rebound and point to reduced uncertainty, which is improving the reliability of banks’ capital trajectories,” the ECB said. “However, banks should remain prudent when deciding on dividends and share buy-backs.”
The ECB issued a de facto ban on payouts in March last year and in December capped dividends and buybacks for the first nine months of 2020 at 15% of profit for the previous two years, or 20 basis points of a bank’s key capital ratio, whichever was lower. It was expected to lift the cap after saying it would do
so “in the absence of materially adverse developments.”
Ten of the biggest euro-area banks have more than 22 billion euros ($26 billion) set aside to reward shareholders, according to calculations by Bloomberg. BNP Paribas SA, Banco Bilbao Vizcaya Argentaria SA, ING Groep NV, Intesa Sanpaolo SpA and Nordea Bank Abp are sitting on the biggest reserves.
The ECB also reiterated previous calls on banks to be “prudent” when deciding on bonuses. The supervisor previously demanded that banks including Deutsche Bank UniCredit and BNP Paribas cut their bonus pools for 2020 when it deemed them as too generous, Bloomberg News has reported.
Even with dividend cap removed, the ECB’s note of caution shows policy makers are worried that true damage from the health crisis has yet to materialise on lenders’ balance sheets. Banks shouldn’t underestimate “the risk that additional losses may later have an impact
on their capital trajectory as
support measures expire,” the central bank said.
Still, bank leaders will likely welcome the announcement on Friday. Many of them last year slammed the ECB’s de facto ban, with Societe Generale SA Chairman Lorenzo Bini Smaghi and Banco Santander SA’s Ana Botin among its greatest detractors. Bini Smaghi, a former ECB official, went as far as to say that it risked making European banks “un-investible.”
Policy makers responded to the criticism by saying their recommendation helped to bolster balance sheets and ensure that credit continues to flow to firms. The restrictions were also part of a trade-off under which banks got unprecedented support from governments which guaranteed hundreds of billions of dollars of loans and regulators that allowed them to use flexibility in accounting for doubtful loans. The ECB also extended a key plank of its relief measures by nine months in June.