by Francesco Canepa and Valentina Za
FRANKFURT (Reuters) – The banking supervisor of the European Central Bank (ECB) has called on euro zone banks to preserve their capital in the face of a deteriorating economic outlook, several sources familiar with the matter said.
Banks such as UniCredit and Société Générale published exceptional quarterly profits, thanks to the rapid rise in interest rates and trading activities, and announced cash distributions to shareholders.
But with the specter of an economic recession in the euro zone and urgings from supervisors to be cautious, banks may find it more difficult to reward their shareholders as generously next year as their capital reserves could be lower than estimated, three sources said.
The ECB believes some banks are relying on overly optimistic economic scenarios, based on models that cannot fully capture the damage caused by record inflation, the sources say.
An ECB spokesman declined to comment.
Eurozone banks are expected to pay out 40 billion euros in dividends in 2022, according to Morgan Stanley, plus more than 60 billion spent on share buybacks between this year and 2023 – an outsized return compared to recent trends. .
But the outlook on distributions is already beginning to darken.
Italian bank Intesa Sanpaolo has postponed until at least early next year half of its €3.4bn share buyback program cleared by the ECB in June, preferring to wait and see magnitude of the economic contraction in Italy.
“It’s not a good idea to pour in capital in a recession,” CEO Carlo Messina said last week.
The central bank of Sweden on Wednesday recommended that the country’s banks “to be restrictive with regard to the payment of large dividends and share buybacks”.
The ECB has given the green light to all takeovers subject to its approval this year, including those of UniCredit, Societe Generale and ING, one of the sources said, decisions greeted with relief by shareholders after the limitation imposed at the height of the COVID-19 pandemic.
But some bankers feel the ECB’s validation process is too cumbersome, industry sources report, adding to their frustration with the ECB’s decision to shelve subsidized loans and what they perceive to be interference in operational decisions.
Andrea Enria, head of banking supervision at the central bank, on Tuesday called on banks to factor in recession risk when planning future distributions.
“There is a disturbing dissonance between the positive outlook and the unique combination of risks we currently face,” he told a colloquium on the banking sector in Germany.
Comforted by much larger capital reserves than at the time of the financial crisis and by the expected increase in income thanks to the rise in interest rates, several banks are resisting.
After determining fixed shareholder remuneration as part of a plan until 2024, despite the ECB’s preference for a payout ratio, UniCredit boss Andrea Orcel has pledged to reach the same distribution objective as this year, of 3.75 billion euros.
James von Moltke, the chief financial officer of Deutsche Bank, said on Wednesday that the ECB and other institutions should instead “support the banks to help the economy”.
But some analysts believe that the economic reality, regardless of the pressure exerted by the authorities, could well make the bankers change their minds.
“With the economy entering recession, the days of massive bank payouts are over,” said Marco Troiano, managing director of Scope Ratings.
(French version Laetitia Volga, edited by Jean-Stéphane Brosse)
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