European banks fear investor flight after dividend bans

Bank bosses bragged at the start of the coronavirus pandemic that, unlike the financial crisis, their institutions would help save rather than overthrow the global economy. But for many of their shareholders, 2020 was the year that European lenders came close to being unable to invest.

Despite a recent modest recovery, European bank stock prices have fallen by around a quarter this year. Industry executives fear that the flight of investors from the sector will mean lenders will have a harder time raising capital in future times of stress.

European banks have had to set aside more than 100 billion euros in additional capital this year for a reduction in lending, an increase of 150% from the previous year. But the biggest blow to their reputation with shareholders was the cancellation of nearly 40 billion euros in dividends following pressure from regulators.

“It has clearly changed the investment case for European banks,” said Jaime Ramos-Martin, manager of global equities at UK fund manager Aviva Investors, which controls £ 346 billion in assets.

In March, the European Central Bank ordered the 113 lenders under its supervision to suspend € 30 billion in payments to shareholders in the days following the spread of the coronavirus pandemic in Europe.

Weeks later, the UK’s Prudential Regulation Authority, a branch of the Bank of England, called on UK lenders to follow suit. After initially resisting the pressure, the UK’s five biggest banks have conceded and canceled dividends worth £ 7.5bn.

Equity investors have traditionally viewed banks as strong, albeit low growth, businesses that can be relied on for regular income. “But dividend bans mean that thinking doesn’t really work anymore,” Ramos-Martin said.

The bank bosses were caught in the midst of a tense confrontation. On the one hand, their regulators have given priority to building capital buffers pending an increase in defaults. On the other hand, their investors demanded a resumption of payments.

“All it has done is undermine investor confidence and it is a major breach of trust with our shareholders, which they will not quickly forget,” said the CEO of a major bank British. “It will make future fundraisers more expensive. In addition, it was unnecessary, the industry did not need it, we had and have solid capital.

Robert Swaak, chief executive of ABN Amro, the Dutch majority-owned bank, added that the dividend ban has been a key point of discussion with investors this year. “Shareholders are very vocal about returns,” he said. “What we feel is what any bank feels.” ABN shares have fallen about 50 percent this year.

The dividend bans have drawn criticism from some shareholders, notably those of HSBC. Although the lender is listed in London, a third of its shares are held by Hong Kong-based retail investors who rely on its dividends for their income.

Thousands of people have threatened to sue HSBC over its decision to cut dividends for the first time in nearly 75 years. The question has reignited a debate over whether the bank should move its headquarters to Asia, where it gets the most of its income.

Bank Santander executive president Ana Botín criticized the ECB’s stance on dividends © Pierre-Philippe Marcou / AFP / Getty Images

“Regulators are too focused on capital soundness and under-focused on profitability and the ability to recapitalize in a crisis,” said Julian Wellesley, senior analyst, global equities at Loomis Sayles, an investment group American with $ 328 billion in assets. “If you make banks incredibly unattractive from a capital perspective, you can hurt them in the long run. “

Throughout the year, bank bosses lobbied regulators to allow them to start paying dividends again.

Speaking at an online event in September, the presidents of Société Générale and Santander, Lorenzo Bini Smaghi and Ana Botín, each criticized the ECB’s position. Mr. Bini Smaghi said the policy made banks ‘non-investable’, adding: “The ban on dividend distributions … is a measure that scares investors from entering the banking industry.

Ms Botín argued that European regulators were giving her American competitors an advantage.

Debt investors also pushed for a resumption of dividends. “If a bank runs into trouble, it needs to access the equity markets to rebuild its reserves,” said Marc Stacey, senior portfolio manager at fixed income specialist BlueBay Asset Management. “The low book value and stress on stocks is absolutely important for bondholders. “

After testing the capital positions of banks, the PRA and the ECB finally gave in to industry calls. This month, they announced that they would allow dividend payments next year, but with heavy restrictions in place.

UK banks will be able to pay dividends of up to 25% of their cumulative profits over the previous two years and 0.2% of their risk-weighted assets. Eurozone banks, meanwhile, have had tighter limits of 15 percent on profits over the previous two years and no more than 0.2 percent of their senior capital ratio.

UBS analysts have estimated that dividend yields will fall in eurozone banks by an average of 3.5% to 1.5% due to the limits. More profitable banks with stronger balance sheets – such as Nordic lenders, Intesa Sanpaolo from Italy and ING from the Netherlands – will be hit hardest.

UK banks would have a lot more leeway, with potential dividend yields ranging from 1.6% at Lloyds to 3.2% at Barclays.

Despite the binding conditions, the lifting of dividend bans gave bank executives reason to be optimistic about their ability to end a difficult 2020.

“It has not been an easy year, it goes without saying, but the banks in Europe – and certainly Société Générale – are in much better shape than you think,” said Frédéric Oudéa, managing director of the lender. French, whose share price is down about 45%. percent this year.

“I hope that, quarter after quarter, step by step, things will improve.”

Additional reporting by Stephen Morris in London and David Keohane in Paris