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Europe's dividend ban hurts bank investors. These shares are most impacted

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Europe's dividend ban hurts bank investors. These shares are most impacted

When the European Central Bank asked banks not to pay dividends until 2021, it recognized the move would not go down well with investors.

"We know that investors have not been particularly pleased with our decision, but we think this is a necessary action to be taken at this stage of heightened uncertainty," Andrea Enria, chair of the ECB's supervisory board, told reporters July 28 following the announcement.

The ECB had in March requested that European banks postpone dividend payments and share buybacks until at least October, but it has now extended this recommendation by three months, saying it will help banks absorb losses and support lending throughout the coronavirus crisis.

Market participants warn the move could starve investors of a key revenue source, and that a blanket ban could unnecessarily punish better-capitalized banks, pushing up cost of capital.

Shareholders have already seen a significant drop in 2019 dividends paid by European banks as a result of the ban, though different payment schedules and interpretations of the recommendation have led to variations in how dividends are impacted, S&P Global Market Intelligence data shows.

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U.K. lenders such as Barclays PLC, NatWest Group Plc and Lloyds Banking Group PLC, which pay dividends semiannually, have suspended the second payment for 2019, while HSBC Holdings PLC, which pays quarterly dividends, canceled the fourth distribution of the year in light of the ECB ban.

Meanwhile, a large group of lenders have suspended dividends for the full year of 2019, including France's BNP Paribas SA, Société Générale SA and Crédit Agricole SA and Germany's Deutsche Bank AG and Commerzbank AG. They all distribute profits to shareholders once a year, and the ECB's recommendation in March came just before most of them were due to approve 2019 dividends at their annual general meetings.

Spanish lender Banco Bilbao Vizcaya Argentaria SA was the only one of the 20 largest European banks that paid out its 2019 dividends in full, having already authorized the allocation of profits before the ECB released its recommendation.

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Rather than suspending dividends altogether, some banks have adjusted or split their payouts.

Spain's CaixaBank SA, for one, slashed its cash dividend for 2019 to 7 euro cents per share, down from an originally proposed 15 cents. Its peer Banco Santander SA, which paid out 10 euro cents per share for the first half of 2019, has said it would further propose a scrip dividend of 10 cents per share for 2019, payable in new shares.

Swiss banks UBS Group AG and Credit Suisse Group AG decided to pay a dividend per share of 36.5 U.S. cents and 13.9 Swiss centimes, respectively, covering only half of their planned dividend distributions for 2019, while postponing a decision on the other half to the fourth quarter of the year.

At Finland-based Nordea Bank Abp, meanwhile, the board of directors has been authorized to decide on a dividend payment of a maximum of 40 cents per share for the financial year 2019, after Oct. 1, 2020. The bank is yet to communicate whether it intends to still go ahead with this plan in light of the more recent ECB advice.

Dividend cancellations and sharp share-price drops across European banks have driven shareholder returns significantly down since the beginning of the year. Worst hit are Société Générale and Lloyds, where total returns dropped by 57.12% and 55.54%, respectively, over the period, according to S&P Global Market Intelligence data.

Deutsche Bank was the only one of Europe's 20 largest lenders to provide a positive return, while Danske Bank A/S, UBS and Nordea shareholders faced some of the lowest losses compared to peers.

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No 1-size-fits-all

A prolonged suspension of dividends could have adverse consequences, Scope Ratings said July 28. For shareholders, banking dividends represent a key source of revenues, supporting their own creditworthiness, and may also represent an important income source for local communities, especially for entrenched mutually owned retail groups, it said. The ring-fencing of intragroup revenues may also become an issue for conglomerates, it added. International groups have relied on foreign subsidiaries being able to pay dividends to nonoperating holding companies.

As for the banks, while the ECB ban is credit positive in the short term, if such a policy is extended for too long it risks increasing banks' cost of capital over time, especially those that are well-capitalized, according to Scope.

Banks and analysts have especially questioned the ECB's decision to issue the same request to all banks across Europe.

Nordea Chairman Torbjörn Magnusson has previously dismissed a proposal to freeze bank dividend payouts for the rest of 2020 as "a bit illogical" because it does not take into consideration the different financial positions of European banks. The pan-Nordic lender is one of the best-capitalized banks in Europe.

In Germany, the financial watchdog is reportedly ready to exempt some smaller German banks from the ECB dividend ban this year if they can demonstrate a healthy level of profitability and sufficient capital cushions.

Scope Ratings said it believes the "one-size-fits-all approach to dividend payments could come into question in the long run if it appears to be too rigid and/or has adverse unintended effects."

The rating agency highlighted the fact that banks across Europe face different post-lockdown operating conditions, with some recovering more rapidly than others. It gave the Nordics as an example of a region where some banks have large capital buffers and are operating in better-performing domestic economies.

In a July 28 note, equity analysts at UBS ranked European banks on their ability to resume a normalized dividend policy, based on their capital levels and capacity to withstand credit stresses.

It placed Nordea at the top, followed by Nordic peers Svenska Handelsbanken AB (publ) and DNB ASA. NatWest was in seventh place and Danske Bank qA ninth.

BBVA was ranked last on the list of 38 banks, while Standard Chartered PLC and BNP Paribas landed towards the bottom, placed 33rd and 34th respectively.