Financial Services

Bank of England scraps pandemic-era curbs on bank dividends

ECB likely to take steps to avoid ‘excessive dividends’ when cap is lifted

The Bank of England has lifted curbs on dividend for banks. Photograph: iStock

Tue Jul 13 2021 - 07:48

The Bank of England scrapped its remaining pandemic curbs on dividends paid by HSBC, Barclays and other top lenders with immediate effect on Tuesday, saying its stress tests showed they could cope with the fallout from Covid-19 on the economy.

Bank of England governor Andrew Bailey said Britain’s rapid vaccination rollout had led to an improvement in the economic outlook, allowing the central bank to relax its controls on how much lenders can pay to shareholders.

“But risks to the recovery remain. Households and businesses are likely to need continuing support from the financial system as the economy recovers and the government’s support measures unwind over the coming months,” Bailey said in a statement.

Shares in British lenders rose, with HSBC, NatWest , Barclays, Standard Chartered and Lloyds all up by between 1 per cent and 2 per cent, compared with a 0.3 per cent gain for the FTSE 100 index.

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As Britain shut down much of its economy for the first time in March last year, the BoE told lenders to suspend dividends and share buy-backs until the end of 2020 and it also recommended scrapping bonuses for senior staff.

The BoE initially eased its curbs last December as the pandemic’s fallout became clearer, saying payouts could resume within “guardrails”.

The BoE's Financial Policy Committee (FPC) said the "extraordinary guardrails on shareholder distributions are no longer necessary" following its annual stress test of banks' financial health.

The US Federal Reserve said in June that large banks would no longer face coronavirus crisis restrictions on how much they can spend in buying back stock and paying dividends.

European Central Bank

Elsewhere, the European Central Bank could take steps to ensure that lenders avoid paying excessive dividends later this year, when it will “most likely” lift a cap on payouts, a top official said.

Margarita Delgado, a member of the ECB's supervisory board, said in an interview on Monday that the central bank will call on lenders to remain "cautious." Her remarks dampen the possibility of a surge in payouts as the European economy shakes off the worst impact of the pandemic.

The ECB will push banks that propose excessive shareholder rewards “to go back to a more average distribution policy,” said Ms Delgado, who is also the deputy governor of Spain’s central bank. “We have other tools if the bank doesn’t accept the recommendation of the supervisor.”

Such steps could – in exceptional circumstances and after “constructive” dialogue – include subjecting lenders to higher capital requirements or qualitative measures. In addition to an assessment of a bank’s financial strength, the ECB will compare payout plans to those with a similar size or business model, she said.

Insolvency Risks

European lenders are itching to boost shareholder returns after the ECB’s de facto ban weighed on their stock prices last year. Ms Delgado’s comments, though, show regulators are bracing for a potential rise in corporate insolvencies as loan-payment holidays end and Covid-19 variants heighten uncertainty.

The ECB will take a decision on whether to lift the cap on dividends later this month, after capping them for the first nine months of the year.

“We will analyse the situation of each of the banks – that’s what back to normal means,” Ms Delgado said. “Let’s take Bank X, which is solvent enough, prudent enough, with enough management buffers and very strong recurring profitability, probably that bank will be allowed to pay not only for 2021 results, but also 2020.”

Ten of the biggest euro-area banks have more than more than €22.2 billion set aside to reward shareholders, according to calculations by Bloomberg. BNP Paribas, Banco Bilbao Vizcaya Argentaria, ING Groep, Intesa Sanpaolo and Nordea Bank are sitting on the biggest reserves.

Bankers slammed the de facto payout ban last year. Societe Generale Chairman Lorenzo Bini Smaghi, a former ECB official, said it risked making European banks "uninvestable." Policy makers say the cap has helped to bolster balance sheets and ensure that credit continues to flow to firms.

Non-performing loans

Ms Delgado said monitoring credit risk will be a top priority for supervisors this year and next. “We’re pushing the banks in order to have an adequate and prudent recognition of potential losses of the loans,” she added.

The deputy governor expects an increase in non-performing loans in Spain, most likely in the first half of 2022, though she said that "I don't believe this will be a dramatic shift."

The Spanish economy contracted more sharply than any other in the euro area last year, and the outlook for the all-important tourism industry hinges in part on the trajectory of Covid-19 variants.

Ms Delgado urged Spanish and euro-area banks to take steps to address low profitability. Lenders in Spain such as CaixaBank SA and BBVA have recently cut staff numbers as part of an effort to trim costs.

Those cuts were smaller than originally announced though, with banks under pressure from the Socialist-led government to reduce firings during the pandemic. Spain already had one of Europe’s highest unemployment rates before the Covid-19 crisis hit. – Bloomberg, Reuters

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