Covid-19 seems to have radically changed the fortunes of Europe’s banks.
Two years after the pandemic’s arrival brought fears of a banking apocalypse, lenders in Europe are posting bumper profits. They are overflowing with capital and their share prices are soaring. There’s even new hope of an end to the negative interest-rate policies that have caused so much anxiety in the sector for the past half decade or more.
But, deeper down, less has changed, as the drivers behind a new shift to share buybacks demonstrate.
In early 2020, bans on bank dividends and share buybacks interrupted a gradual post-2008 recovery in European banks’ shareholder distributions. Fast forward to today and European banks’ capital pay-outs are not only at record levels but there are also share buybacks, almost unheard of in the sector pre-Covid, especially in the eurozone.
In 2022, it is becoming more common than not for a big, healthy European bank to have a buyback programme. Buybacks will constitute about a third of overall sector distributions in 2022, Bank of America research shows. Banks that have announced particularly large buybacks so far include BBVA, Intesa Sanpaolo, NatWest, UBS and UniCredit.
The reason for this is, firstly, to return excess capital not paid out during the pay-out bans. Covid lockdowns don’t seem to have resulted in the feared increases in bad debt that were behind the bans at the start of the pandemic. Banks are turning much more towards buybacks rather than special dividends to return these one-off amounts.
Buyback volumes will, therefore, decline in 2023, but they will remain at a much higher level than pre-Covid, according to Bank of America. The reason? Even after the pent-up effect of pay-out bans, banks will have more capital to distribute than during the 2010s, when the sector set aside about €77 billion a year to cope with Basel III.
In the previous decade, some banks – especially in Scandinavia – felt flush with capital. But the wider sector faced a shortfall compared with the amount that regulators would eventually demand, under Basel. Now, bankers don’t see capital needs going down, yet the gradual step-up in requirements seems mostly over.
Let’s not get carried away here. European banks will still focus more on dividends than their US counterparts. This is partly to do with a shareholder base in Europe, especially in banking, that is more orientated to income. Many European banks have a particularly large share of retail […]