UBS and Credit Suisse divide the 2019 dividend into two tranches. This is a multi-faceted decision that has been preceded by many discussions.
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Dividend reduction – a difficult topic for the big banks.
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Apparently there was extensive discussion before the two big banks UBS and Credit Suisse (CS) decided to split their dividends for the 2019 financial year into two tranches. Half of the distribution will be received by shareholders this spring, the other half in autumn, provided that investors agree to the plans of the institutes at an extraordinary general meeting.
Just don’t unsettle investors
More than other companies, banks struggle to miss out on the dividend. Such a move quickly scares bondholders and savers; they suspect that something is wrong with the financial institution and that it is preparing for an emergency scenario.
The expectation of the financial market regulator Finma that the banks should pursue a cautious dividend policy has therefore caused some hectic activity among financial institutions. This became even greater as more and more European institutions complied with the request of the European Central Bank (ECB) to forego distributions at least until October 1st.
UBS in particular encountered a major dilemma. Since it makes relatively few share buybacks and pays a high cash dividend, its situation was more uncomfortable than that of Credit Suisse (CS), which has recently shifted the weight towards buybacks: after all, the dividend total 2019 of the largest Swiss bank is 2.6 billion. $, while the CS is only CHF 678 million. In contrast, the CS planned to buy back its own shares for CHF 1 to 1.5 billion this year.
UBS and CS in step
But for the time being nothing will come of it. As early as March, Finma had asked the banks to refrain from buying back. Such a measure sounds reasonable in the current environment and hardly makes waves. It would have been more difficult for the banks to communicate a dividend waiver. In the case of UBS, investors would have asked themselves why the bank is now suddenly holding back the high sum of $ 2.6 billion after management has repeatedly stressed how solid the company is.
The Finma was apparently aware of this problem. In any case, in the past two weeks the authority has remarkably often emphasized how well Swiss banks are endowed with capital and how well they have implemented the tightened capital requirements since 2008.
It would still have been a problem for UBS if it had had to announce a dividing of the dividend out of the blue and as the only bank. Remarkably, the CS is now taking the same step despite the much lower payout – and it communicates this at the same time as the big competitor. In this way, the tours of both institutes can save face and investors remain calm. And it seems that the action between UBS, CS and Finma has been agreed.
Of course, it can be argued forever whether it is wise that the banks are currently paying dividends. UBS and CS certainly want to keep their shareholders happy with a distribution after their share prices fell sharply in the wake of the corona pandemic. In this regard, the major Swiss banks do not want to fall behind American houses. These distribute the dividend on a quarterly basis so that the shareholders already have the 2019 distribution.
Unlike many industrial companies, the two big banks are not in a moral dilemma. So far, they have not been paid short-time work, while countless companies in other sectors receive such money and are not afraid to pay a dividend.
On the other hand, nobody knows what dimensions the economic crisis triggered by the pandemic will take. Bank managers still believe that the current turmoil primarily affects the so-called real economy. In this way, the crisis differs from that of the year 2008, when the banks were in existential trouble through their own fault and for a long time did not want to perceive the disaster.
As evidence, UBS announced ahead of time that it expects to make a net profit of $ 1.5 billion in the first quarter. However, it could have shaken the financial sector much more if the central banks had not massively expanded the funding programs in favor of the banks and the financial market.
The ZKB is once again sailing in the slipstream
Astonishingly, such a controversial discussion does not have to concern a weighty bank: As so often in previous years, the Zürcher Kantonalbank (ZKB) navigates through turbulent times without getting on the radar. Hardly anyone asks the critical question whether the small, large bank ZKB should distribute a dividend as it intends to do.
Of course, the canton of Zurich and the municipalities are careful not to instigate such a discussion. And ZKB boss Martin Scholl said in an interview with the NZZ that the public sector is now dependent on the distribution of his bank. Like the UBS and Credit Suisse, the ZKB is a systemically important institution, and it would also be affected if there were a long and severe recession.
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