By Patricia Kowsmann
The European Central Bank said Tuesday that lenders can restart limited dividend payments next year following a nine-month ban and told banks to be prudent about bonuses given the economic crisis caused by the pandemic.
The ECB move follows a lifting of a ban by the Bank of England last week. Along with the Federal Reserve, most major bank regulators restricted bank dividends and buybacks when the pandemic hit the economy earlier in the year. Stopping payouts helped preserve capital, giving banks bigger buffers to absorb losses as customers hit tough times. But the lack of payouts also hammered bank shares.
The issue of dividend payments is a contentious one for banks on the Continent. Even before the pandemic, they struggled to generate profits amid sluggish economic growth and negative interest rates. Dividends were one of the few reasons investors held their shares.
The Euro Stoxx Banks index is down more than 20% this year, compared with a 6% fall in the Euro Stoxx 50 blue-chip index.
The ECB said Tuesday that dividends and share buybacks need to be below 15% of the combined profits for the past two years or no higher than 0.2 percentage point of the common equity tier 1 ratio, whichever is lower. Banks need to be profitable and "have robust capital trajectories," it added. While the ECB calls these instructions recommendations, the banks treat them as rules since going against them would likely lead to serious regulatory reprisals.
The ECB's conditions are harsher than those imposed last week by the Bank of England, which limited dividend distribution to 25% of 2019 and 2020 profits combined or 0.2% of the bank's risk-weighted assets, whichever is higher.
The ECB also said it sent a letter to banks asking for moderation in their bonus policies.
"The reputational impact of the payment of variable remuneration during a global crisis situation should not be underestimated -- particularly in the case of large individual amounts -- and should be duly considered, " Andrea Enria, the ECB's bank-supervision head, said in the letter.
Mr. Enria previously defended the dividend ban and bonus moderation saying governments have provided trillions of euros in financial support to the eurozone, including guaranteed loans that eased the burden on lenders.
Internally at the ECB, the issue of dividends has been divisive. While some supervisory board members thought that an extension of the ban was warranted given the pandemic's impact on banks is still unknown, others worried the restriction would do more harm than good.
Banks have lobbied intensely to lift the ban. Some argued that bigger payouts would lift their share prices, making it easier to raise capital if needed.
"Restricting dividends can increase banks' funding costs, have an impact on their access to capital markets and make them less competitive than their international peers," said Yves Mersch, vice chairman of the ECB's bank supervisory board, at a September conference.
Despite the ban lift, the ECB remains worried about the health of the region's banks. Last week ECB President Christine Lagarde unveiled a fresh round of bond buying, plus a slew of cheap lending programs aimed at helping banks funnel credit into the economy. She warned the eurozone economy would likely slip back into contraction in the last three months of this year and grow more slowly than expected next year, as a second wave of the pandemic forced many countries back into lockdowns.
Earlier this year, Mr. Enria said bad loans in the eurozone could soar as high as EUR1.4 trillion, equivalent to $1.7 trillion, under an extreme economic scenario. That amount would be more than during the aftermath of the financial crisis.
The ECB and other regulators have urged banks to keep close checks on their loan books, renegotiating with borrowers and assuming losses if they see trouble. Their fear is that banks can run out of capital, need state help or even fail if they are suddenly faced with a wave of defaults.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com
(END) Dow Jones Newswires
12-15-20 1451ET
