European banks urged to cut dividends to strengthen their capital

LONDON – European banks are bolstering their capital by canceling or delaying dividend payments, worrying about their ability to absorb a possible rush of bad debts as households and businesses are hit by the coronavirus pandemic.

On Tuesday evening, the UK’s four largest banks in terms of assets said they had agreed to cancel the 2019 dividends not yet paid, after receiving formal demands from the Bank of England.

Central banks and regulators started ordering dividend restrictions last week, sending some European bank shares plunging as shareholders took into account the loss of income and saw a deterioration in the outlook for the sector. Dividends and share buybacks have been a major driver of banking stocks in the region in recent years.

The Italian UniCredit SpA and the Dutch banks ING Groep and ABN AMRO Group NV are among those which have announced the suspension of dividends. On Tuesday, HSBC Holdings PLC, Lloyds Banking Group PLC, Royal Bank of Scotland Group PLC and Standard Chartered PLC all canceled their dividends for 2019 and agreed not to pay or accumulate any in 2020.

Authorities have relaxed bank capital rules to encourage lending and help banks respond to stresses many have never experienced before.

Analysts said it was inevitable that policymakers would want banks to cut or delay dividends, buyouts and employee bonuses, in case further support measures were needed.

“It makes sense at a time like this to close your dividends and preserve your capital. Six months from now we’ll have a much better idea of ​​what capital looks like, ”said John Cronin, banking analyst at Goodbody Stockbrokers. He expects dividends and other payments to shareholders to be “socially unacceptable” until the full extent of the coronavirus crisis is known.

S&P 500 companies have invested more than $ 5.3 trillion in repurchasing their own shares since 2010. WSJ explains how share repurchases work and why there is debate as to whether or not they are good for it. the economy.

The European Central Bank said on Friday that dividends for 2020 and those yet to be paid for 2019 should not be paid until at least October, to help banks “support households, small businesses and corporate borrowers and / or to absorb losses on existing exposures. to such borrowers.

Share buybacks are also excluded. The aim is to “maintain precious capital resources within the banking system in these difficult times”, said Andrea Enria, chairman of the supervisory board of the European Central Bank, on Friday.

The Swiss financial regulator urged last week to cut dividends, saying “acting to preserve strength is not a sign of weakness”.

A group of the largest American banks, including Bank of America Corp.

and Citigroup Inc.,

said they would suspend share buybacks, but would have to pay previously announced dividends. Credit Suisse Group in Switzerland AG

and the UBS Group AG

have indicated that they will pay the 2019 dividends as planned.

The problem is less acute for US banks since their relatively strong earnings mean they are accumulating capital at a faster rate. On the other hand, many European banks have gone through restructuring phases which have consumed capital.

European banks would preserve 45 billion euros ($ 50 billion) of capital by keeping 2019 dividends not yet paid, Goldman Sachs analysts said on Tuesday.

They recommend investing in large, well-capitalized banks that were previously considered likely to make larger payments to shareholders with their excess capital. Now the focus is on the main purpose of capital as a loss-absorbing buffer, they said.

“The capital is still there. However, its relevance to shareholders has changed, ”analysts said.


Receive a coronavirus briefing six days a week and a weekly health newsletter once the crisis is over: sign up here.

Write to Margot Patrick at [email protected]

Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8