ECB urges banks to pause shareholder payouts

The move is said to deal a blow to some lenders who had lobbied to resume business as usual

FRANKFURT • The European Central Bank (ECB) extended a de facto ban on banks returning capital to shareholders and urged them to show restraint on bonuses amid the coronavirus outbreak, dealing a blow to some lenders who had lobbied to resume business as usual.

The supervisor asked banks not to pay dividends or buy back shares at least until January, three months longer than initially indicated and to be extremely moderate with variable remuneration, according to a statement yesterday. The ECB said it would review its stance again in the fourth quarter (4Q).

Separately, the Bank of England (BoE) said it would also conduct a review at the end of the year of any plans by Britain’s biggest banks to pay dividends or resume buybacks. HSBC Holdings plc, Barclays plc and Lloyds Banking Group plc, among other large banks, suspended payouts earlier this year at the BoE’s urging.

Both central banks had told lenders in March to conserve capital as lockdowns to combat the pandemic brought the economy to a standstill. While the move was painful for some companies and their investors, the ECB indicated it was a trade-off for unprecedented regulatory relief it had granted them to weather the crisis.

Since then, banks including BNP Paribas SA have been lobbying to resume dividend payments as they seek to shore up slumping share prices, Bloomberg reported. A historic trading rally, regulatory relief, and extensive government loan guarantees have bolstered earnings at several banks. Switzerland’s UBS Group AG indicated last week that it might return more capital to shareholders toward the end of the year.

“We know that investors have not been particularly pleased with our decision, but we think this is a necessary action to be taken at this stage of heightened uncertainty,” Andrea Enria, ECB’s top banking watchdog, told reporters yesterday. “It is important to ask banks to focus their capital resources on lending and loss absorption.”

Bloomberg reported last week that the ECB was leaning toward extending the ban on dividends until at least the end of the year. The ECB said it would take into account the economic environment, stability of the financial system and banks’ ability to plan their future capital levels when it reviews its stance again.

“Banks may resume dividends once the uncertainty subsides, even with levels of financial strength that are below the ECB’s overall demands, as long as the lenders can show that their capital positions are sustainable in the medium term,” the watchdog said.

The BoE said its assessment in the 4Q “will be based on the current and projected capital positions of the banks and will take into account the level of uncertainty about the future path of the economy, market conditions and capital trajectories prevailing at that time”.

The 23-member Euro Stoxx Banks Index rose 0.9% as of 10:41am in Frankfurt yesterday, paring its decline this year to 34%.

The ECB also conducted an assessment of how vulnerable eurozone banks are to various scenarios for how the economy could be affected by the pandemic. The findings included:

  • In the central scenario of a “harsh” recession, banks’ aggregate common equity Tier 1 ratio would fall by about 1.9 percentage points to 12.6% by the end of 2022.
  • In the “severe” scenario, the ratio would decline by 5.7 percentage points to 8.8%.
  • In that case, “several banks would need to take action to maintain compliance with their minimum capital requirements, but the overall shortfall would remain contained”.
  • “Overall, the results show that the euro-area banking sector can withstand the pandemic-induced stress”.

The central bank has previously said its dividend request kept about €30 billion (RM149.7 billion) of capital in the euro-area banking system. It has urged banks to comply on a voluntary basis, although its chief watchdog has said the ECB can take “legally binding measures” if the lenders do not do as asked.

The ECB reiterated a call for banks to dip into their capital buffers to maintain the flow of credit. The supervisor said it would not require banks to start replenishing buffers until after capital depletion reaches its peak, at any rate not before the end of 2022.

The central bank said that it won’t extend much of the operational relief it afforded banks in addressing deficiencies such as inadequate risk models, although lenders with levels of bad debts will be granted an additional six months to submit their plans for dealing with such soured loans. — Bloomberg