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European banks set to pay out more to shareholders, Scope says

After a decade of building up their core capital ratios to satisfy tighter regulatory requirements, European banks will likely start returning excess capital to shareholders in the future, Scope Ratings said in a Dec. 5 report.

The common equity Tier 1 ratios of European banks have reached a peak, paving the way for increased dividend payouts or share buybacks, the rating agency said. The median CET1 ratio level of the 157 institutions in Scope's sample increased to 15% as of June 30, from 10% at the beginning of the decade.

Furthermore, shareholders are likely to push for payouts rather than agree to banks using the excess capital for investments in growth-pursuing strategies, Scope said.

"Current equity valuations imply that most European banks are value-destroying operations," the agency said.

With the current interest rate environment and capital requirements, capital returns via dividends or buybacks are the most value-creating strategies for shareholders, Scope analyst Marco Troiano said at a presentation of the report.

Jean-Pierre Mustier, CEO of Italian bank UniCredit SpA, expressed a similar view at the FT Banking Summit on Dec. 4.

Given the discount to tangible book at which European bank shares are trading, more banks should follow UniCredit in offering share buybacks, he said.

"It is important for investors to see what is the best payout," he said. Cash dividends aside, "when you have excess capital it is probably better to buy back shares at a discount to book than do anything else", Mustier said.

UniCredit recently announced plans to return €8 billion to shareholders within three years via cash dividends and a share buyback. The bank prefers the buyback to spending excess capital on mergers and acquisitions, he said.

UniCredit's total payout ratio will stand at 40% in 2020 to 2022, increasing to 50% in 2023. Cash dividends will account for 30 percentage points between 2020 and 2022 and 40 percentage points in 2023. The share buyback will make up the other 10 percentage points.

Other banks that have indicated potential share buybacks in the future include Barclays PLC, Royal Bank of Scotland Group PLC and Bankia SA, according to Scope. Several large European banks, including DNB ASA, Credit Suisse Group AG, HSBC Holdings PLC and UBS Group AG have already announced or completed such plans in 2019.

A gradual increase in equity payouts is not necessarily bad news for bank credit, the rating agency noted. All share buybacks are subject to regulatory approval, and if they get a green light it shows the watchdogs' confidence that capital buffers are sufficient, Scope said.

"It would also vindicate the theory that following the great re-regulation of this decade, banking should increasingly be seen as a utility-like, low-risk and low-but-stable-return sector," the agency noted.