The Supervisory Board of the European Central Bank yesterday agreed to lift the veto on banks’ dividends. However, it is urging them not to distribute more than 15% of accumulated profits in 2019-2020, nor exceed 0.20 points of the CET1 capital ratio. From both options they have to choose the lesser one. The measure will be in force until end-September 2021, when it will be reviewed to see if it can be lifted in light of the economic situation. This limit is far below what they distributed before this crisis, between 40% and 50% of profits. The decision comes only a few days after learning of the Bank of England’s move, which has lifted the veto by imposing restrictions which would mean a pay-out of up to 25%.
According to Morgan Stanley, the end of the dividend veto “will allow the cost of equity in the sector to be normalised”:
“Although potential payouts are below consensus expectations, the key is the decision itself to lift the ban. On average, we estimate a dividend yields of 2%, which is symbolic for the majority.”
The estimates of Renta4’s analysts assume the absence of dividend payments, so they think that this limitation will not result in a high consumption of capital for those entities that have not discounted the dividend. They explain:
“And in some cases where the dividend payment has already been taken into account (e.g. Caixabank), it will have a positive effect on capital, although not a significant one. “
The banks, which consider the payment of the dividend key to maintaining their shareholder base, expected to distribute 8 billion euros this year compared to 7.3 billion in 2019. The whole sector has welcomed the ECB’s move. Sabadell (+5%) and Bankia (+3.5%) stand out at leaders in the share price rises.
This news to a great extent already discounted by the market. In spite of this and as a reference, experts at Bankinter points out that tonight the ADRs of Santander and BBVA have rebounded approximately 2% in NY.
“We believe today the banks will bounce back moderately, but they will rebound. Particularly those with better capital bases (+1%/+2%?),” say the analysts.
The ECB temporarily suspended the distribution of dividends (by means of a recommendation, but in reality understood as imperative instruction) on 27.03.2020. It was later reaffirmed on 28.07.2020. The objective was to favour the reinforcement of European banks capital base in the face of the risks posed by the pandemic.