Europe's Banks Urged to Cut Dividends to Shore Up Capital

By Margot Patrick

European banks are shoring up capital by canceling or delaying dividend payments, amid concern about their ability to absorb a potential rush of bad loans as households and companies feel the pinch of the coronavirus epidemic.

Central banks and regulators started ordering curbs on dividends last week, sending some European bank shares diving as shareholders factored in the lost income and considered a worsening outlook for the sector. Dividends and share buybacks have been a main driver of banking stocks across the region in recent years.

Italy's UniCredit SpA and Dutch banks ING Groep and ABN AMRO Group NV are among those that have announced dividend suspensions.

Authorities have loosened bank capital rules to encourage lending and help banks respond to stresses that many have never experienced before. Analysts say it was inevitable policymakers would want banks to reduce or delay dividends, buybacks and employee bonuses in case further backstops are needed.

"It makes sense in a time like this to shut off your dividends and preserve your capital. In six months time we'll have a much better idea of what capital looks like," said John Cronin, an analyst at Goodbody Stockbrokers. He predicts dividends and other shareholder payouts will become "socially unacceptable" until the full extent of the crisis is known.

On Friday, the European Central Bank said 2020 dividends and those still due to be paid for 2019 shouldn't 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 off the table. The aim is to "keep precious capital resources within the banking system in these difficult times," Andre Enria, chair of the supervisory board of the European Central Bank wrote in a blog post Friday.

Switzerland's financial regulator urged dividend curbs last week, and the Bank of England is expected to toughen guidance shortly.

"Acting to preserve strength is not a sign of weakness," the Swiss regulator said.

In the U.S., a group of the largest banks have said they would suspend share buybacks but are expected to pay previously-announced dividends. Some European banks, including the U.K.'s HSBC Holdings PLC and Switzerland's Credit Suisse Group AG and UBS Group AG have indicated they will pay out 2019 dividends as planned.

The issue is less acute for U.S. banks since their relatively strong earnings means they have been accruing capital at a faster rate. In contrast, many European banks have been undergoing restructuring that consumed capital.

European banks would preserve EUR45 billion in capital by retaining 2019 dividends not paid yet, Goldman Sachs analysts calculated in a note Tuesday.

They recommend investing in large, well-capitalized banks that had previously been seen as likely to make bigger payouts to shareholders with their excess capital. Now the focus is on capital's primary purpose is as a loss-absorbing buffer, they said.

"The capital is still there. Its relevance to shareholders, however, has shifted," the analysts said.

Write to Margot Patrick at [e-mail]

(END) Dow Jones Newswires

March 31, 2020 10:07 ET (14:07 GMT)

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