European banks plan 40% payout ratio for 2023 shareholder returns

European banks are on track to make the most significant shareholder distributions in recent years as solid profitability amid high interest rates boosts their capital levels.

The total dividend payouts and share buybacks banks plan to make through 2023 is around €53.36 billion, or about 40% of their profits, according to the European Banking Authority's latest risk assessment and transparency exercise. The distribution plan is significantly above the €48.40 billion banks planned for 2022, although they ended up distributing some €62.65 billion.

As record profits were reached in 2022 and profitability continued into the first half, actual payouts for 2023 might eclipse what banks set out at the beginning of the year, the EBA said. Some banks benefited from higher interest rates more than others depending on business models and asset and liability structures, the regulator said.

In June, the European Central Bank said that although dividends are above pre-pandemic levels, much of the likely increase in banks' capital distributions would be in the form of share buybacks. Repurchases have increasingly become a favorite tool for distributions for banks, accounting for 33% and 29% of total planned payouts on 2021 and 2022 profits, respectively, versus being virtually non-existent between 2017 and 2019, experts at the central bank said.

France-based BNP Paribas SA, the largest bank by assets in the eurozone, launched a €2.5 billion buyback in April and received approval for a second tranche of the same amount in July. In late September, Spain-based Banco Santander SA announced a 2023 interim dividend totaling €2.62 billion, or about half of its first-half profits.

– Access capital adequacy details for BNP Paribas and Banco Santander on S&P Capital IQ Pro. – Access the Peer Analysis template on S&P Capital IQ Pro.

Banks' capital levels reached new highs, the EBA said, adding that buffers above capital requirements also increased. "Strong profitability drove up retained earnings while sluggish loan growth kept increases of risk-weighted assets at bay," the regulator said.

At the end of June, banks' aggregate common equity Tier 1 (CET1) ratio was 15.9%, versus 15% a year before. Their aggregate leverage ratio also increased to 5.7% from 5.2%.

Banks' CET1 capital — the highest-quality capital — increased by €72 billion to €1.5 trillion as of June-end, the EBA found. The 5% increase was entirely driven by organic capital generation from solid profits.

Yet, the regulator warned that interest rate hike-fueled profitability might have reached its peak. The number of banks expecting further increases in their net interest incomes is lower, the EBA noted.

The EBA's assessment covered 123 banks from 26 countries across the EU and the European Economic Area.