No dividends until 2021. The European Central Bank is once again turning to European banks and is extending the recommendation not to detach coupons to shareholders until January 2021, together with that of not carrying out buybacks and avoiding paying too generous bonuses to the top management. The request comes once again from the Supervision of the ECB led by the Italian Andrea Enria.
DIVIDENDS: THE MARCH STOP
On March 27, with a decision so unprecedented as to leave the market speechless, Frankfurt had recommended to the banks to suspend the payment of dividends for the financial years 2019 and 2020 at least until 1 October 2020. The aim of the initiative, Enria explained, was to strengthen the banking sector's ability to absorb losses and support the provision of credit to households, SMEs and companies during the coronavirus pandemic. A request immediately accepted by almost all European banks which in a few days suspended the disbursement of almost 30 billion euros of coupons. The undistributed dividends, the ECB had highlighted, represent “approximately 1,8% of equity and 35% of total profits” of banking institutions.
DIVIDENDS: THE NEW RECOMMENDATION OF THE ECB
Four months have passed since the first recommendation and the ECB has decided to ask the banks, but above all their shareholders, for further prudence and patience. The requests that arrived today, July 28, are similar to the previous ones: "to adopt extreme moderation" in disbursing bonuses to top management "to preserve capital during the crisis", avoid securities repurchase operations and do not detach dividends at least until January 2021 (the previous request stopped in October 2020).
The decision "was not taken lightly", explained the head of Banking Supervision Enria, admitting that he was "aware of the concerns raised by investors". “We prefer be cautious today rather than having regrets tomorrow should the general economic conditions worsen further”.
The Eurotower then specifies that this recommendation “remains temporary and exceptional and aims to maintain the banks' ability to absorb losses and to support the economy in a scenario of exceptional uncertainty” which “makes it difficult for banks to have visibility on their capital”.
Indeed, according to the latest analyzes carried out by Frankfurt, the “level of capital in the system could decrease significantly if one were to materialise serious scenario. In a simulation on the effects that Covid 19 could have on the banking industry, two different scenarios are shown. In the base scenario (GDP -8,7%), the system Cet1 could decrease by 1,9%, falling from 14,5 to 12,6%, in the most severe scenario (GDP -12,6%) the impact on Cet1 would be 5,7%, a collapse that would bring the figure from 14,5 to 8,8%. Given that the occurrence of the worst-case scenario cannot yet be averted, the European Central Bank has decided to issue a new call for prudence, specifying that the recommendation will be reviewed in the fourth quarter of 2020. If all goes well, "banks with sustainable capital positions may consider resuming dividend payments."
THE RESPONSE OF THE ITALIAN BANKS
The first Italian bank to respond presently is Unicredit which, through a note dated 29 July, informs that "following the recommendation of the ECB of 28 July 2020, UniCredit confirms that it will not pay dividends and will not carry out buybacks of treasury shares in 2020".
BANKITALY
As happened in March, a few hours after the arrival of the ECB's recommendation, the Bank of Italy issued a note in which it implemented Frankfurt's request, extending it to less significant banks and SIMs subject to the rules of the CRR/CRD IV package .
Last update: 11.06 am on Wednesday 29 July.
