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FIGFIG People and Markets

Now is not the time to resume bank dividends

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As countries across Europe tighten coronavirus restrictions in the run-up to Christmas, the European Central Bank saw fit to relax its ban on dividends on Tuesday and pave the way for resumed payments in 2021.

But as clouds are now starting to build over the European banking system, it seems foolish to lift these restrictions and allow banks to deplete precious capital.

The European Banking Authority warned the market this week to expect a “substantial deterioration” in bank asset quality in 2021.

The proportion of stage two loans on EU loan books has risen to 8.2% from 6.9% last year, while those of the highest quality — stage one loans — dropped from 89.2% to 88.4%.

Despite this, EU lenders are yet to see the full impact on their non-performing loan ratios because 7.5% of loans in the sector are covered by government guarantees on new lending and payment holiday schemes.

But as life gets back to normal, and governments start to remove these stabilisers, will a wave of defaults set in?

ECB supervisory head Andrea Enria estimated that the ban on dividends would free up €30bn of capital for Eurozone banks to support lending and absorb losses throughout the course of the coronavirus pandemic.

This has helped to support an increase in the average total capital ratio to 18.64% at the end of the second quarter — up by 64bp compared to a year prior, according to ECB supervisory banking statistics.

Instead of depleting this amid a global pandemic by restarting dividends, banks might find it prudent to conserve this increased capital ahead of the storms to come next year.

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