It’s ironic that Banco Santander is leading the charge back to cash dividends, given it has one of the lowest capital ratios in European banking.
Its millions of Spanish retail investors largely explain Santander’s eagerness to push for shareholder approval now. It is aiming for a 50% cash dividend payout over its 2020 earnings, paid early next year. Many of these investors rely on such dividends for their income.
However, it also shows how hard banks are lobbying ahead of a European Central Bank (ECB) decision in December on whether to lift the dividend ban.
The ECB’s chief supervisor Andrea Enria in effect imposed the ban in March. Now European banks’ capital ratios are running at an average of about 350 basis points over their regulatory minimums, or about €300 billion, according to KBW. That’s half the sector’s market capitalization. Even Santander has about €16 billion in excess capital.
Perhaps Santander’s rush back to dividends also suggests it is not so eager for big acquisition opportunities brought about by the coronavirus – whether in Spain, where Banco Sabadell is the next big merger candidate, or in Britain, where ailing Sabadell-owned challenger bank TSB could otherwise help Santander bulk up its own subscale UK operation.
Existential crisis
However, make no mistake: European banks, especially mid-tier lenders, are in an existential crisis.
Many European banks had already lost the ability to earn their cost of equity before the coronavirus hit, due to negative interest rates and fintech competition. Recent regulatory forbearance has helped, but they need mergers more urgently than ever now to reduce costs and to afford future loan write-offs.
The deeper problem is banks’ business models, not the dividend ban
Before the crisis, European banks were pinning their hopes on capital distributions. Since the dividend ban, however, this has been impossible.
Perhaps the ECB should see that it remains so for lenders, such as UniCredit, whose long-term profitability is too low. The risk of allowing dividends on a case-by-case basis is that it sends a bad signal about the health of banks that cannot pay them.
Excess capital
One good thing about the dividend ban is that it encourages banks to use excess capital for the upfront costs of well-thought-through mergers, instead. This goes beyond the stabilization and political-signalling function the ban had six months ago.
Bankia’s €4.5 billion of excess capital, for example, is more than its entire market cap. On the other hand, it has one of the least sustainable business models in Europe, as it’s so reliant on rate-tracking mortgages.
Ana Botin (below) would probably rather cut her losses than double down in the UK
Its merger with CaixaBank will mean less excess capital in the short term, but brings greater cross-selling capability and could eventually save the two banks €770 million a year.
This puts the onus on firms such as Santander. The latter is still digesting its 2017 acquisition of Banco Popular, which like Sabadell was a leading lender to Spanish SMEs, a less attractive sector now.
Santander’s executive chairman Ana Botín would probably rather cut her losses than double down in the UK. In either country, though, competition rules would not prevent a Santander-Sabadell merger.
The Bankia deal was relatively easy, as the two banks are stronger than most from an asset quality and capital standpoint. A merger between Sabadell and Santander, or indeed BBVA – unlike Bankia and CaixaBank – may require new capital. That probably means the sale of peripheral businesses, although not paying dividends would help.
Removing the dividend ban would not suddenly make it easy to turn to the equity capital markets, however, as rights issues would still be highly dilutive. The biggest reason why share valuations are so low today – when even a relatively strong bank such as Santander trades at only a third of its book value – is the economy.
The deeper problem is banks’ business models, not the dividend ban.
