Speed bumps inhibit driver enthusiasm but they rarely stop travel. The European Central Bank has lifted its bank dividend ban but payout restrictions remain. Banks cannot reward shareholders as quickly as hoped. But investors will still sense that things are moving in the right direction. European bank share prices initially bounced in response. See this move as good news.
As the Financial Times reported early this week, Europe’s banking watchdogs have decided the time is right to allow the recycling of some bank profits back to shareholders. There is a limit, however: up to 15 per cent of banks’ past two years of profits and no higher than 0.2 per cent of their common equity tier one capital ratios.
In March, shortly after the virus began to spread, the ECB ordered a conservation of €30bn worth of capital by stopping all buybacks and dividends. Only profitable banks, with sufficient capital buffers to absorb more pandemic-induced shocks, will be able to distribute dividends.
Lex views shareholder repayment as essential for institutions that hope to raise private capital in the future. The only question is whether the ECB could have waved banks on a bit more. Compared with the Bank of England’s Prudential Regulation Authority rules — which permit payouts of up to a quarter of the past two years of profits, or 0.2 per cent of risk-weighted assets — the ECB’s look a tad feeble. Moreover, the ECB penalises banks, such as Intesa Sanpaolo of Italy and Finland’s Nordea, with the strongest balance sheets and profitability. Both banks’ share prices fell on the day.
Any good news for Europe’s stock market clunkers deserves attention. The ECB has stated that all being well, banks can return to normal payout practices from October — less than a year away. To preserve confidence in the system this will follow stress tests in July.
Moreover, European fund managers hold few banks in their portfolios, points out Andrea Filtri at Mediobanca. They have plenty of space to make additions. No surprise that European bank shares have outpaced peers in the US and Asia in recent months.
For now, however, implied sector dividend yields below 2 per cent suggest the traffic cops remain vigilant. The road is clearing but don’t put your foot down too soon.