ECB’s Lagarde Says Bank Payout Cap Could Lift End September

(Bloomberg) -- European banks could see a cap on dividends and share buybacks lifted at the end of September, according to European Central Bank President Christine Lagarde, offering the clearest signal yet that the industry will be able to boost returns for long-suffering shareholders.

The European Systemic Risk Board could allow its call for restrictions to lapse if economic and financial sector conditions do not deteriorate materially, Lagarde told European lawmakers on Thursday in her capacity as head of that institution. “The improved economic outlook on the back of rapid progress in vaccination campaigns has reduced the probability of severe scenarios,” she said.

European bank stocks were battered last year after regulators issued a de facto ban on shareholder returns as a trade-off for unprecedented relief and taxpayer-funded stimulus in the pandemic. The ECB and other authorities later capped dividends and share buybacks in the first nine months of 2021 to account for uncertainty over how the economy will fare.

“We see investors' focus increasingly shifting to dividends where we expect a decision in favor of lifting dividend restrictions,” JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a report on Thursday. Clarity on “future cash dividends is key for investors.”

The 22-member Euro Stoxx Banks Index rose as much as 2.2% on Thursday, putting it on course for the biggest increase in a month. Austria's Bawag Group AG, Banco Bilbao Vizcaya Argentaria SA of Spain and France's Societe Generale SA led the gains.

Nordea Bank Abp, Intesa Sanpaolo SpA and BBVA appear the “most attractive” in JPMorgan's analysis of European banks' cost of equity.

Subsequent to Lagarde's remarks, Andrea Enria, the ECB's top banking oversight official signaled that lenders won't be allowed to make excessive payouts to investors.

“We expect distribution plans to remain prudent and commensurate with banks' internal capital generation capacity and with the potential impact of a deterioration in the quality of exposures, also under adverse scenarios,” he told members of the European Parliament on Thursday. “Which should be helpful for sector sentiment.”

The JPMorgan analysts took a similar view, saying they don't expect banks to be able to return to a “free for all” in terms of payouts. The unwinding of government support as well as uncertainty over when the economy will reopen fully will probably mean the ECB will take a “cautious approach” as regards special dividends, especially on 2019 earnings, they wrote.

Enria said last month that the supervisory board would take a decision on the cap on July 23. Lagarde said that ESRB, which brings together a wider range of authorities, will consider the matter at its next meeting in September.