Banks really want to pay dividends

The largest European banks do not give the impression that Europe is in a pandemic and deep crisis. Now they want to pay their dividends despite warnings from bank regulators.

Frankfurt. In the third quarter, ten of the largest banks in the region posted the lowest level of doubtful loan provisions since the coronavirus pandemic began – a total of $ 8.6 billion, one-fifth of the loan loss provision of $ 39.8 billion in the first half. At the same time, banks like Spain’s Banco Santander are citing their financial strength as an argument to persuade the regulators to allow dividend payments again. Houses like Deutsche Bank advocate larger bonus payments for bond traders who have made super returns.

The tone struck by European banks is in stark contrast to the worsening situation with new corona infections and restrictions that could bring more economic burdens. The banks ‘demands come at a time when taxpayers’ money is being used to moderate the effects of lockdowns, which can bankrupt businesses and put millions of workers out of work. Given this discrepancy, bankers risk a collision course with regulators.

Credit defaults are only a matter of time

“We are in a very negative position full of uncertainty, and now is not the time to lift the dividend ban,” says Antonella Sciarrone Alibrandi, professor at the Università Cattolica del Sacro Cuore in Milan. “There is some contradiction when banks want flexibility in rules and provisions for bad loans, but at the same time want to resume paying dividends and big bonuses.”

Banks received unprecedented relief from regulators, freeing up capital to absorb losses or to fund loans. On Thursday, the President of the ECB, Christine Lagarde, reminded the banks that the relief was conditional. Lending institutions would have to help finance all sectors of the economy, not just big corporations. The head of the ECB referred to the deteriorating situation in the region. She warned that some banks were providing loans to companies on less favorable terms and that higher risk ratings could weigh on banks’ willingness to lend.

“Credit risk is currently the top priority,” said ECB banking supervisor Andrea Enria at a conference on Wednesday. He advised banks not to wait until the situation got worse to identify customers who could face financial difficulties. “It is a question of when and not whether the asset quality of the banks will deteriorate in this crisis,” said the governor of the Spanish central bank, Pablo Hernández de Cos.
Bankers argue that they are doing their job, but the supervisors want to punish them and could make matters worse as they undermine investor confidence.

“Since the beginning of the pandemic, we have expanded lending and we are providing extensive liquidity,” said Santander CEO José Antonio Álvarez on a conference call on Wednesday. “We are still getting results and on that basis we are asking them (the ECB) to allow us to pay dividends.”

Confrontation is imminent

Banks Barclays, Standard Chartered and HSBC have also cited their financial health as an argument for resuming distributions next year. The Swiss banks UBS and Credit Suisse want to increase earnings for shareholders in 2021 and have announced buybacks totaling more than three billion US dollars.

The ECB and Bank of England are expected to review their de facto dividend bans by the end of the year. The leading Swiss banks have it easier and this year they are allowed to split their distributions into two.

“The banks are currently looking extremely good because the governments are cushioning the greatest burdens from the crisis,” said Jörg de Vries-Hippen, Chief Investment Officer of Allianz Global Investors. “If I were politicians or the ECB, I would be extremely cautious about taking this path and allowing them to pay dividends now, even if they so wish.”

Bonus payments account for a smaller proportion of banks’ capital outflows than dividends, but the performance bonuses are controversial. The ECB has made it clear that it expects the banks in the euro area to be extremely moderate in terms of variable remuneration in order to preserve capital. The securities firms could thus be on a course of confrontation with the supervisory authorities. (Bloomberg)

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