Due to the coronavirus emergency European banks have suspended the disbursement of dividends for almost 30 billion euros. While shareholders continue to bite their hands for having missed the opportunity to access coupons and attractive yields, the European Central Bank quantifies the amount of coupons that banks should have paid to their shareholders on last year's profits. At the end of February, everything indicated that we would have found ourselves facing a very rich dividend season. In March, however, the explosion of the coronavirus emergency, first in Italy and then throughout Europe, reshuffled the cards on the table, pushing the ECB to recommend the banks to suspend the disbursement of their dividends, not to undertake coupon payment commitments for the years 2019 and 2020 at least until October and to suspend the buyback operations.
"To strengthen banks' ability to absorb losses and support the provision of credit to households, SMEs and companies during the coronavirus pandemic - the ECB reads - dividends for the 2019 and 2020 financial years are not expected to be paid until at least October 1, 2020”, read the note published by the Eurotower on 27 March. A request as strong as it is unprecedented which hinted at what the economic consequences of the health crisis that hit the countries of the EU would be.
In an article that will be published together with the next six-monthly report on financial stability, the ECB provides figures and percentages on dividends suspended by banks. In total, according to Frankfurt calculations, the lenders that fall under the direct supervision of the ECB "have withheld around 27,5 billion euros of profits".
Before the pandemic exploded in all its severity, iThe bank's dividend payout on 2019 profits amounted to around 35,6 billion euros. At the end of March, when the ECB recommended suspending everything, 6,2 billion coupons had already been paid, while just under 2 billion euros went into payment after his warning.
Non-distributed dividends, the ECB explains again, represent “approximately 1,8% of equity and 35% of total profits” of these banks. Now the profits retained by the banks could be used to cover "an increase of about 60 billion euros" in non-performing loans, the Eurotower underlines again.
The ECB also highlights that if the Eurozone banks had not responded positively to its recommendation, paying out and increasing dividends as they did in past years, they would have weakened their ability to set aside profits to absorb losses and support the real economy.
The study finds that the ECB recommendation was followed by similar initiatives by all national authorities in the euro area. And the fact that these indications have come from the authorities has allowed the banks to block dividends “without suffer the negative stigma effect which occurs when they do it autonomously – says the ECB study -. However, the increased cost of capital combined with the prospect of not receiving dividends can undermine the ability of banks to raise private capital”, concludes the Institute led by Christine Lagarde.
