European banks are expected to carry out dividend payments and share buybacks representing 74.8% of 2020 earnings this year as they catch up on pandemic-linked delays to distributions, according to the European Banking Authority's annual risk assessment.
Banks including ING Groep NV, Banco Bilbao Vizcaya Argentaria SA and Nordea Bank Abp have already kicked off share repurchase programs, while the likes of Swedbank AB (publ), Skandinaviska Enskilda Banken AB (publ) and DNB Bank ASA paid extra dividends to shareholders in the fourth quarter of 2021, after getting the green light from regulators.
In 2020, European banks paid €7.2 billion in dividends and share buybacks, representing a payout ratio of just 8.8% based on 2019 earnings. That compares to their original intentions to distribute 41.2%, the EBA said. On average, banks recorded a payout ratio of 59% in the five years before the pandemic.
The EBA's risk assessment and transparency exercise covered 120 banks across 25 countries in the European Economic Area, excluding the U.K.
Click here to access the EBA Transparency Exercise template in the S&P Capital IQ Pro Template Library.
The drop in last year's payments came after the European Central Bank in March 2020 imposed a de facto ban on payouts, with other regulators following with similar measures aiming to boost banks' capacity to absorb losses and support lending during the COVID-19 pandemic.
The EBA said the few payments that were made in 2020 were either done before the publication of the dividend ban or were due to other obligations not related to shareholder remuneration. These include payments for Additional Tier 1 instruments that are considered equity, payments from subsidiaries to minority shareholders and the purchase of own shares for employee pension schemes.
In December 2020, the ECB replaced the dividend ban with a cap, which it then revoked at the end of September 2021. Many European banks will presumably exercise "catch-up dividends or share buybacks" in the last quarter of 2021 or in 2022, the EBA said.
The region's banks have bolstered their capital cushions during the pandemic, recording an average common equity Tier 1 ratio of 15.5% at the end of the second quarter, up from 14.7% a year earlier.
While some banks had already deducted deferred dividends from their CET1 ratio as of the second quarter, for most banks, catchup distributions and buybacks will not be reflected in the EBA's latest figures.
Given pandemic-related uncertainties, the EBA called on banks to "maintain prudent capital distribution policies," adding that even though supervisory restrictions have expired, banks should "not pursue overly generous" dividend and share buyback strategies.
The EBA's exercise also found an increase in nonperforming loans within sectors hit particularly hard by the pandemic, including hospitality and leisure-related activities, despite an overall improvement in the asset quality of banks' portfolios.
