From the left, the presidents of CaixaBank, José Ignacio Goirigolzarri; from Banco Santander, Ana Botín; and from BBVA, Carlos Torres, in an archive image.

The European Central Bank (ECB) has agreed this Friday the total lifting of the restrictions on the distribution of dividends by banking entities that it imposed in March 2020 as a measure to conserve the maximum possible capital of the bank to face the consequences of the economic crisis caused by covid-19. From now on, supervisors will evaluate the capital and dividend distribution plans of each entity within the normal supervisory process, indicates the ECB.

The decision, which will be applied as of September 30, means ending 18 months of drought in dividends, although last December the hand was opened a bit to allow the distribution to shareholders of 15% of the usual amount in a year .

As reported by the president of the ECB’s Supervisory Board, Andrea Enria, this veto on dividends has been lifted, which was not a legal prohibition as such, given the foreseeable improvement in the economy, although it continues to demand prudence from the managers. “Institutions must be prudent and not underestimate credit risk when making their decisions on dividends,” says the note.

The latest macroeconomic projections, says the ECB, “they confirm the economic rebound and point to a decrease in uncertainty, which is improving the reliability of banks’ capital trajectories. Supervisors have reviewed banks’ credit risk practices during the pandemic. Consequently, it is appropriate to reestablish the prior supervisory practice of commenting on capital trajectories and dividend distribution or share buy-back plans with each entity in the context of the normal supervisory cycle ”, explains the note from the European supervisor.

Risk of future losses when removing supports

In appealing to prudence, the Supervisory Board recalls that the objective is to ensure “the sustainability of its business model”. And remember that the crisis is not over, as the governor of the Bank of Spain, Pablo Hernández de Cos, frequently points out. “They also don’t have to underestimate the risk that additional losses may subsequently impact their capital trajectory as support measures are phased out.”

From now on, an entity’s capital trajectory and its dividend distribution plans will be analyzed according to “the results of the 2021 stress test. They will also carefully examine the entities’ practices in terms of credit risk that they can affect the credibility of your capital track record. The supervisors will interact with the institutions during the summer in the framework of the normal supervisory dialogue ”, explains the ECB.

Although it was not a legal impediment, all the banks followed the recommendation of the European supervisor, something that this publicly valued on several occasions. A month ago the ECB anticipated that it would lift this impediment to dividends, something important for the sector because it took away incentives for investors, who already punish the sector for its low profitability.

The decision assumes that banks will be able to return to remuneration to shareholders without limitation, as well as to buy back their own shares in the market and reinstate variable remuneration to their managers and employees.

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BBVA and Bankinter are already preparing their operations

Last Thursday, Bankinter announced that it expected to distribute 50% of the profit among its shareholders in cash, as well as the variable pay. BBVA announced that, after the sale of its US subsidiary to the PNC group for 9.6 billion euros, it would buy back up to 10% of its shares, depending on their price. The bank has recovered the price it had before the start of the pandemic, but it is far from the levels it had in 2017.

Although the decision was made this Friday, the effective lifting will not take place until September 30. A recent study prepared by the ECB concluded that the recommendation that euro zone entities avoid distributing dividends among their shareholders in response to the uncertainty of the crisis caused by the pandemic had an average adverse impact of 7% on the valuation of the bank shares.

The ECB limitation “urges banks to consider not paying cash dividends or repurchasing shares, or limiting said remuneration below 15% of the accumulated profit in 2019 and 2020, so that it does not exceed 20 basis points of the capital ratio. ordinary (CET 1) ”.

The ECB also addressed a letter to each of the CEOs of the significant entities reiterating its expectations that they apply extreme moderation in variable remuneration, during the same period of time provided for the profit distribution recommendation (September 30, 2021). He asked that they “consider the impact on the reputation of the payment of variable remuneration in the current crisis situation, in particular when it comes to high individual amounts.”

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