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Bank bosses bragged at the start of the coronavirus pandemic that, unlike during the financial crisis, their institutions would help save rather than topple the global economy. But for many of their shareholders, 2020 was the year that Europe’s lenders verged on uninvestable.
Despite a modest recent rally, European bank share prices are down about a quarter this year. Industry executives fear that investor flight from the sector means lenders will find it harder to raise capital in future times of stress.
Europe’s banks have had to set aside more than €100bn of additional capital this year in preparation for souring loans — a 150 per cent increase on a year earlier. But the biggest hit to their reputation among shareholders was their cancellation of close to €40bn of dividend payments following pressure from regulators.
“That has clearly changed the investment case for European banks,” said Jaime Ramos-Martin, global equities manager at UK fund manager Aviva Investors, which controls £346bn of assets.
In March, the European Central Bank ordered the 113 lenders under its supervision to suspend €30bn of shareholder payouts within days of the coronavirus pandemic spreading to Europe.
Weeks later, the UK’s Prudential Regulation Authority, an arm of the Bank of England, called on British lenders to follow suit. After initially resisting the pressure, the UK’s five largest banks conceded and cancelled dividends worth £7.5bn.
Equity investors have traditionally viewed banks as solid, if low growth businesses that can be relied upon to pay steady income. “But dividend bans means that way of thinking does not really work any more,” said Mr Ramos-Martin.
Bank bosses have been caught in the middle of a tense showdown. On the one side, their regulators have prioritised building up capital buffers in expectation of a surge in defaults. On the other, their investors have demanded a resumption of payouts.
“All it has done is undermine investor confidence and is a major breach of trust with our shareholders, one they will not quickly forget,” said the chief executive of a large UK bank. “It will make future fundraising more expensive. Also, it was pointless, the industry didn't need it, we had and have strong capital.”
Robert Swaak, chief executive of ABN Amro, the Dutch bank that is majority owned by its government, added that the dividend ban has been a key discussion point with investors this year. “Shareholders are very vocal about returns,” he said. “What we’re feeling is what any bank is feeling.” ABN’s shares are down about 50 per cent this year.
The dividend bans drew criticism from some shareholders, notably those of HSBC. Although the lender is listed in London, a third of its shares are owned by Hong Kong-based retail investors who rely on its dividend for income.
Thousands of individuals threatened to sue HSBC over its decision to cut dividends for the first time in nearly 75 years. The issue reignited a debate about whether the bank should relocate its headquarters to Asia, where it makes the most of its revenue.
“Regulators are over focused on capital strength and under focused on profitability and ability to recapitalise in a crisis,” said Julian Wellesley, senior global equities analyst at Loomis Sayles, a US investment group with $328bn of assets. “If you make banks incredibly unattractive from a capital perspective you can hurt them in the long term.”
Throughout the year, bank bosses have lobbied regulators hard to allow them to restart paying dividends.
Speaking at an online event in September, the chairs of Société Générale and Santander, Lorenzo Bini Smaghi and Ana Botín, each criticised the ECB’s stance. Mr Bini Smaghi said the policy was making banks “uninvestable”, adding: “The prohibition to distribute dividends . . . is a measure which is scaring investors from entering the banking sector.”
Ms Botín argued that Europe’s regulators were giving her US competitors an advantage.
Debt investors have also pressed for a resumption of dividends. “If a bank runs into trouble, it needs to access equity capital markets to restore its buffers,” said Marc Stacey, a senior portfolio manager at fixed income specialist BlueBay Asset Management. “Low price-to-book values and equity stress absolutely matters to bondholders.”
After testing banks’ capital positions, the PRA and ECB eventually yielded to industry calls. This month they announced they would allow dividend payments next year, but with heavy restrictions in place.
British banks will be able to pay out dividends up to the higher of 25 per cent of their cumulative profits over the previous two years and 0.2 per cent of their risk-weighted assets. Eurozone banks, meanwhile, were given more stringent limits of 15 per cent of profits over the previous two years and no higher than 0.2 per cent of their common equity tier one ratio.
UBS analysts estimated that dividend yields would fall across eurozone banks from an average of 3.5 per cent to 1.5 per cent due to the limits. More profitable banks with stronger balance sheets — such as Nordic lenders, Intesa Sanpaolo of Italy and ING of the Netherlands — will be hit hardest.
British banks would have much more leeway, with potential dividend yields ranging from 1.6 per cent at Lloyds and 3.2 per cent at Barclays.
Despite the binding conditions, the lifting of the dividend bans has given bank executives reason for optimism that they can start to put an arduous 2020 behind them.
“It’s not been an easy year, needless to say, but banks in Europe — and certainly Société Générale — are in much better shape than people think,” said Frédéric Oudéa, chief executive of the French lender, whose share price is down about 45 per cent this year.
“Hopefully, quarter after quarter, step by step, things will improve.”