The ECB has asked lenders to be ‘extremely moderate’ when setting bonuses © Ronald Wittek/EPA/Shutterstock

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The European Central Bank has called on lenders to continue to freeze dividend payments until at least January and urged them to be “extremely moderate” when setting staff bonuses during the coronavirus pandemic.

The recommendations from the central bank are designed to help banks absorb losses and support lending throughout the crisis, which has left the eurozone economy facing a severe recession.

Andrea Enria, chair of the ECB’s supervisory board, said he accepted the delay to dividends would upset bank shareholders but added the measures were “exceptional and temporary”.

“We have seen there has been an impact on market prices, as expected,” he said. “We know investors have not been particularly pleased with our decision, but we think it is necessary action to take at this stage of heightened uncertainty. It is important to ask banks to focus their capital resources on lending and loss absorption.”

The Bank of England’s Prudential Regulation Authority welcomed the ECB’s decision. It said on Tuesday that it would carry out a review in the fourth quarter over whether British lenders could resume paying dividends next year.

European bank stocks have been hit hard this year after lenders were pressed by regulators to suspend capital returns to shareholders at the height of the Covid-19 crisis. The Stoxx Europe 600 Banks index is down more than a third in 2020, compared with a fall of just over 10 per cent for the broader Stoxx Europe 600 index.

Marc Stacey, senior portfolio manager at BlueBay Asset Management, said bank shareholders were frustrated by the ECB’s latest announcement.

“It was expected that freezes on dividends and buybacks would be extended,” he said. “But there is disappointment that we aren’t getting more clarity on what metrics or benchmarks need to be met for distributions to start.”

In March, the ECB ordered eurozone banks to halt dividend payments until at least October, a move that damaged the investment case for a sector that has struggled since the financial crisis.

The ECB’s single supervisory mechanism, which oversees the 117 biggest banks in the eurozone, called on banks to freeze dividends after the lenders benefited from unprecedented regulatory relief to allow them to continue lending to companies hit hardest by the crisis.

Regulators in the UK and Switzerland applied similar pressure on their domestic lenders to suspend capital returns.

British banks — including HSBC, Standard Chartered, Lloyds and RBS — suffered sharp share price drops after announcing they would cancel their 2019 dividend payments in March.

Jonathan Pierce, an analyst at Numis, said he expected banks to start making “token dividend payments” next year. “More significant payments will likely be delayed until at least 2022 and there will be sizeable headwinds as regulatory rules revert to pre-crisis requirements,” he added.

Last week UBS, which is regulated by the Swiss Financial Market Supervisory Authority, said it was considering using $3.6bn of capital reserves on a mix of cash dividends and share repurchases by the end of the year. 

“Share buybacks have been demonised way too much,” said Sergio Ermotti, chief executive of UBS. “Share buybacks in an environment like this one are an excellent way for banks to retain flexibility in their capital return policies.

“[When] bank stocks are trading below tangible [book value], it’s the most natural way to create value for shareholders.”

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