European Central Bank convinced dividend block until September is right

Thursday, January 28, 2021

Europe’s banking supervisor will stick to its guidelines on dividend payouts until September assuming that the economy doesn’t get much worse in the coming months, its chief told CNBC on Thursday.

The European Central Bank’s supervisory board, which overseas banks in the region, asked regional lenders in March to avoid paying cash dividends to shareholders or any buybacks (when a company buys its own stock and increases its share price) in the wake of the pandemic.

This decision was then extended in July and then again in December. However, Andrea Enria, chair of the ECB’s supervisory board, told CNBC that there should be no more extensions if the economy holds in the coming months.

“I remain convinced this is the right stance in a moment of remaining uncertainty. And in a moment in which the ability of the banks, and of the supervisors, to have reliable projections on the capital path for the banks ahead is still very challenging,” Enria said.

“We expect these to improve in the coming weeks and months and as we announced in December if there are no material, significant deteriorations in the external conditions we expect to repeal our recommendation in September,” he said.

The current dividend recommendation is due to last until September 2021. The idea is that banks don’t use their capital to give back to investors and rather safeguard their positions.

The more solid a bank’s capital position is, the better it will be able to absorb any potential losses. It will also be more likely to lend to firms and individuals — a priority during an economic recession.

“A continued prudent approach remains necessary, as the impact of the pandemic on banks’ balance sheets has not manifested itself in full at a time when banks are still benefiting from several public support measures, and considering that credit impairments come with a temporal lag,” the ECB’s supervisory body said in a statement in December.

Banks that want to pay dividends or buy their shares during this period are only allowed to do so if they are profitable and have strong capital positions. They also need to get clearance from the supervisory body in order to do that.

Two Finnish banks said in January they would be paying dividends to shareholders this year.