The European Central Bank has lifted its blanket recommendation against distributions, including dividends and share buybacks, but under strict conditions that will have the biggest impact on eurozone banks with high capital returns, analysts said.

Italy's Intesa Sanpaolo SpA is expected to see the largest shortfall in expected dividend yield under the new restrictions, which limit payouts to 15% of profits accumulated in 2019 and 2020, or to 20 basis points of the banks' common equity Tier 1 ratio, whichever is lower.

Banks under the ECB's remit are still advised to refrain from all dividend payments and share buybacks until Sept. 30, 2021, and not to distribute interim dividends out of their 2021 profits until that date, the regulator said Dec. 15.

Limited distributions

The dividend caps should lead to "very limited distributions for now," ING credit analyst Suvi Platerink said in a Dec. 16 note. Banks should be guided by their future capital generation capacity and the potential impact of COVID-19 on their asset quality and capital, she said.

"Distributions in respect of 2020 earnings are set to be relatively nominal amounts due to continued downside risks to economic growth and banks' balance sheets," S&P Ratings analysts said in a Dec. 16 note. While European banks' regulatory capital ratios have generally improved in 2020 despite the pandemic, the ratios may come under greater strain in 2021 as asset quality is expected to worsen, the analysts said.

Nevertheless, the ECB's decision to allow "a measured resumption of shareholder distributions will not have an effect on bank ratings," the S&P Ratings analysts said.

Elisabeth Rudman, head of European financial institutions group at DBRS Morningstar, told S&P Global Market Intelligence that it is understandable that the ECB would want to continue to restrict banks' dividend payouts, "given that much of the pain in terms of credit losses is still to emerge."

The ECB's approach "will allow the more profitable banks to pay out more than less profitable banks," she said. "Nevertheless, it will also provide another reason for European bank shares to be less attractive than the shares of banks in some other countries and potentially affect their access to fresh capital, if needed."

'Disappointing' rules

The terms under which payments can resume are "disappointing" because this will result in "material shortfalls" in dividend yield versus consensus forecasts for many banks, Berenberg analysts said in a note Dec. 16. Intesa will see the largest shortfall as the maximum permissible yield under the new ECB restrictions will be around 1.7%, compared to a consensus forecast for a 7.1% dividend yield for the Italian bank in 2020, according to Berenberg estimates.

UBS analyst estimates also show Intesa with the largest shortfall among big eurozone banks. Taking into account the ECB restrictions, based on current earnings and risk-weighted assets forecasts for 2020, the prospective dividend yields of eurozone banks are expected to fall to an average of around 2.0%, from UBS' previous estimate of 3.5%, the analysts said in a Dec. 16 note. Banks "perceived as stronger capital return options" will be "penalized to a larger extent by the moderate differentiation embedded in ECB's approach," they said.

French payouts weighed down by law

Finland-based Nordea Bank Abp, Netherlands-based ING Groep NV, Belgium's KBC Group NV and French banks BNP Paribas SA and Crédit Agricole SA are expected to be among the hardest-hit eurozone institutions. They face dividend yield shortfalls of between 170 basis points and more than 400 basis points, according to the Berenberg and UBS analyst estimates.

French banks will be additionally burdened by national law, which requires dividend payments to be made within nine months of the fiscal year's end, Berenberg analysts said. Therefore, unlike eurozone peers, BNP Paribas and Credit Agricole will not have the option to defer their 2020 dividend payments until the ECB restrictions expires at the end of September 2021, they said.

Netherlands-based ABN AMRO Bank NV could pay more than expected as the maximum yield is based on profits for the two-year period of 2019 and 2020, according to Berenberg. While the bank is not expected to pay a dividend for 2020, it could still pay up to a 2.9% yield, they said. Given its high CET1 ratio, the bank would have a strong case under the ECB limitations, they said.

Investor trust fading

The UBS analysts said ABN Amro and compatriot bank ING may become subject of future payout debates with regulators given that both banks have paid out interim dividends for the first half of 2019. ABN Amro has already distributed an amount double the limit given by the ECB, while ING has distributed an amount close to the given limit. However, there seems to be a lack of recognition of these distributions under the current ECB formula, the UBS analysts said.

The analysts said the high excess of capital held at eurozone banks has eroded investor faith in capital ratios, and the "payout ratio-driven dividend rules undermine the incentive to provision early and comprehensively in a downturn." Investors will likely consider the ECB dividend restrictions as tougher than expected, the UBS analysts said.