A one-size-fits-all regulatory policy on dividends is not the right solution for the banking sector as it will drive investors away, outgoing UBS Group AG CEO Sergio Ermotti said Oct. 20, proposing share buybacks as an efficient alternative.
In its third-quarter earnings release, the Swiss bank said it had set up a $1.5 billion capital reserve to be used for potential share buybacks in 2021, when it expects to be allowed to resume repurchases. UBS posted a 99% year-over-year jump in third-quarter attributable net profit to $2.09 billion, and its best pretax profit in a decade of $2.58 billion.
The ECB and Swiss national regulator FINMA have advised banks to refrain from dividend payments and other capital distributions given the uncertainty about the full economic impact of the ongoing COVID-19 pandemic.
Bank credit loss provisions have spiked since the onset of the health crisis in early 2020. The ECB, which has effectively banned dividends until Jan. 31, 2021, is due to discuss a potential lifting of the ban in the fourth quarter.
"Trapping unnecessary capital" in the banks will either make the sector unattractive as an investible asset class or force the system to deploy capital in a way that will not be constructive, regardless of whether it is used organically or inorganically, Ermotti told analysts at a presentation of UBS' earnings.
"If you don't allow the right amount of capital returns to be put back in the system, it is dangerous, particularly when you have banks that are trading below book value," he said.
"There is an opportunity to utilize share buybacks as a very flexible and efficient way to return capital to shareholders."
Buybacks allow more flexibility in terms of navigating future challenges the industry may face, Ermotti said, adding that he does not foresee any political aversion to the planned 2021 buyback in Switzerland so long as the bank demonstrates that it is able to support the economy.
The outgoing CEO also said he understands why bank regulators want to avoid singling out banks that can or cannot pay dividends at this point, but added he hopes there will be more differentiation on a national and international level going forward.
UBS accrued $1 billion for cash dividends over the first nine months in 2020. It will also propose the second installment of its 2019 dividend of $0.365 per share, or $1.3 billion in total, for approval by an extraordinary shareholders meeting scheduled for Nov. 19.
The bank has reported a CAGR in its aggregate tangible book value per share and cash dividends per share of 7% over the first nine months of 2020, which puts it closer to its U.S. peers' average CAGR of 8% than to its European peers' average CAGR of 3%.
"The payout ratio for cash will be similar to our U.S. peers'," Ermotti told analysts.
Ermotti, who is leaving UBS after nine years as CEO, said his successor, Ralph Hamers, is expected to help UBS reach the next level in its digitalization. Former ING Groep NV CEO Hamers will take the helm from Nov. 1. He joined the Swiss bank's executive board in September.