ECB urges "extreme prudence" as it lifts dividend ban
By Abigail Townsend
Date: Wednesday 16 Dec 2020
(Sharecast News) - Eurozone banks can start paying dividends again from the start of 2021, the European Central Bank has said, but only under strict limitations.
In March, the ECB imposed a blanket a ban on cash dividends and share buybacks in response to the Covid-19 pandemic and its impact on the European economy.
In a statement published on Tuesday, the central bank's supervisory board reversed that decision, and confirmed that banks could once again pay dividends from January 2021.
However, it urged the financial sector to hold back paying out to shareholders before 30 September 2021, and said any firm considering paying out ahead of that date should exercise "extreme prudence".
It has also limited dividends to below 15% of cumulated 2019-20 profits, and not higher than 20 basis points of Common Equity Tier 1 ratio, whichever is lower. "Banks that intend to pay dividends or buy back shares need to be profitable and have robust capital trajectories," the ECB said.
Banks will need to contact the Joint Supervisory Team ahead of setting dividends, the ECB said, to "discuss whether the level of intended distribution is prudent. Banks should refrain from distributing interim dividends out of the 2021 profits".
The regulator continued: "The revised recommendation aims to safeguard banks' capacity to absorb losses and lend to support the economy. 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."
Even with the limitations, the decision to lift the ban boosted financial stocks across European bourses.
Kian Abouhossein, analyst at JP Morgan, said the ECB's "relatively conservative" approach implied a dividend yield of around 1.5% for the 2020 full-year, "which is below consensus expectations but slightly ahead of our expectations, which assumed zero payout for 2020".
He said: "Despite the conservative stance on 2020, the ECB does indicate a normalisation of its approach to payouts post September 2021, which keeps the potential incremental capital return towards the end of 2021 still open in our view, and continue to believe that well-capitalised banks will be able to increase payouts for 2021, although this will clearly be back-end loaded to the fourth quarter."
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