Enough guillotine on bank dividends: in a hearing in the European Parliament, both Christine Lagarde, number one of the ECB, who spoke today as chairman of the board for systemic risk (ESRB), and Andrea Enria, number one of the banking supervision of the European Central Bank, made the long-awaited announcement, but also speaking of NPLs, or impaired loans, and not failing to launch calls for caution.
The stocks of European banks welcomed the news: in Piazza Affari, buy on UniCredit, Intesa SanPaolo, Banco BPM, Bper, with investors who are already looking forward to the return to normal in coupon distribution and buyback transactions, scheduled for October.
The enthusiasm was confirmed by the trend ofEuro Stoxx Banks Index, which rose after the announcements up to + 2.2%, and is preparing to report the strongest rise in a month.
The Austrian Bawag Group AG, the Spanish Banco Bilbao Vizcaya Argentaria, the French Societe Generale did very well.
Meanwhile Bloomberg noted that, according to an analysis of the cost of equity of European banks conducted by JP Morgan, and published today, the “most attractive” banks are Nordea Bank, Intesa Sanpaolo and BBVA.
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Coupons banks, Enria: stop cap at the end of the third quarter. But with a ‘but’
“In the absence of significant adverse developments, we plan to repeal our recommendation (not to distribute dividends or to distribute them within a cap) at the end of the third quarter of 2021 and to return to considering dividends and buybacks as part of our normal supervision process “, said Andrea Enria, not failing to add a ‘but’: the European Central Bank, he continued,” expects the distribution plans to remain prudent and proportionate to the capacity to generate capital internal banks and the potential impact of a deterioration in the quality of exposures, even in adverse scenarios “.
So JP Morgan’s team of analysts led by Kian Abouhossein:
“We believe investor attention will shift increasingly to dividends, for which we await a decision in favor of the end of the restrictions “. Clarity “on future cash dividends – reads the note – is the key factor for investors”.
For now, we cannot speak of a decision that has already been made. The same board of European systemic risk chaired by Lagarde stressed how euro area banks could see the caps on coupons and buybacks removed at the end of September, I KNOW economic and financial sector conditions should not suffer a significant deterioration.
“The improvement in the economic outlook due to the rapid progress of vaccination campaigns it reduced the likelihood of severe scenarios, ”Lagarde said.
Even the analysts of JP Morgan have shown, however, some caution, writing that they do not believe that there will be a sort of ‘all green light’:
in their view, the withdrawal of the support that Eurozone governments have so far provided to companies and banks, as well as the uncertainty fueled by the variants of the virus – such as the Delta variant – will ensure that the ECB takes a “cautious approach” on special dividends, especially those concerning 2019 earnings.
Last month Enria had anticipated that the ECB Banking Supervision would take a decision on whether or not to remove the cap imposed on coupons and buybacks on 23 July. Lagarde said the ESRB board will consider the matter at its next meeting in September.
ECB: first fasting, then the strict diet imposed on bank shareholders
It could therefore end at the end of September the diet of shareholders of euro area banks. A diet imposed with the decision of the maximum ceiling announced in December, which allowed some institutions to return to distribute coupons in the face of various stakes, followed by months of real fasting.
This is how the ECB expressed itself when, last December, it removed the absolute stop imposed on coupons and on the buybacks of own shares:
“The ECB expects dividends and share buybacks to remain below 15% of the cumulative profits of the period 2019-2020, and that are not higher than 20 basis points of Common Equity Tier 1 (CET 1) “.
Still “the banks that intend to pay dividends or buy back their shares they must be in profit and have robust capital trajectories ”, read the statement, which added that the recommendations would remain valid until September 2021 ″.
The shareholders of the banks in the Eurozone practically remained dry mouth again throughout 2020. The suspension of the coupons was decided in March last year, in the serious emergency situation triggered by the explosion of the COVID-19 pandemic.
The ECB had decided to recommend to institutions to freeze the payment of dividends and any planned buyback operations until 1 October of the same year. The fear of the credit crunch and the need to ensure that the resources of the banks were primarily to support the real economy, therefore companies and families, had then led to the central bank to decide the stop until next 1 January 2021.
However, as both Enria and Lagarde recalled today, the number one danger is still represented by spectrum of NPLs.
“In the current phase of the pandemic, our financial stability concerns are shifting from liquidity risks in the non-financial corporate sector to their budgetary vulnerabilities “.
Lagarde wished that attention be paid to the balance sheets of companies, avoiding the failure of healthy ones and the domino effect that would have on the banking sector with non-performing loans (NPLs).
“It is important to avoid that the combination of high debt and weaker profits, especially in the sectors hardest hit by the crisis, leads to insolvencies of profitable companies in the medium term,” he said, adding that this would risk increasing “the social and economic cost of this crisis ”and to“ also increase the risk of the banks’ portfolios ”.
Lagarde consequently stressed that, for banks, “the priority is to reflect fully and in a timely manner credit risk, in the classification of loans and in the provision “.
Again, banks “may need to improve their ability to manage and resolve non-performing loans, even by trying solutions to restructure debts“.
Ditto Andrea Enria, who acknowledged that the increase in non-performing loans or NPLs on banks’ balance sheets was lower than had been estimated a year ago. But despite this, it could not avoid warning banks of the risk of non-performing loans:
“This does not mean that there cannot be significant increases – he said in a speech to the European Parliament – we must remain ready, the best way is to take preventive measures”.
Consequently, “the banks will have to be more effective in the management of NPLs, making an upstream evaluation of customers to prevent them ”.