The good times are back in European banking and investors want their share.
(Bloomberg) — The good times are back in European banking and investors want their share.
With income from lending surging as central banks boost rates, nine top euro area banks plan to return more than €30 billion in buybacks and dividends this year. Investors hunting for quick returns are punishing the handful of large banks that didn’t announce a jump in payouts alongside earnings.
Deutsche Bank AG, Societe Generale SA and ING Groep NV, all underperformed the wider index since disappointing with either no new buybacks or lower than expected payouts. SocGen slid the most in seven months on Wednesday after falling short of a distribution pledge.
While results were largely positive, the banks cited regulatory scrutiny and approvals, uncertainty over the economy, or charges related to their Russian businesses for the caution. Yet plans by rivals such as BNP Paribas SA and UniCredit SpA to shell out billions of euros have raised the stakes as lenders fight to restore their battered valuations.
BNP is offering some of the fattest payouts thanks to the sale of its Bank of the West unit in the U.S., while UniCredit plans to distribute €5.25 billion in a mix of cash dividends and share buybacks on 2022 earnings. All told, top euro area banks announced €12.8 billion of stock repurchases to be conducted this year, on top of €17.7 billion in dividends in the first half.
“The bank is very solid as you’ve seen capital-wise, growth-wise,” Lars Machenil, BNP’s chief financial officer said of his firm in an interview with Bloomberg TV on Tuesday from Paris. “We have a bottom line record profit of €10.2 billion and what we’ll basically return to shareholders this year will be roughly that same amount.”
Banks are in a Goldilocks moment as higher interest rates boost earnings from the traditional savings and loan business. At the same time, they’re not rushing to pass on the benefit of higher rates to savers. That growth, coupled with capital the industry built up after the 2008 financial crisis, is now fueling rising payouts, including buybacks, that tend to juice share prices more quickly than dividends.
BNP says it still needs authorization from the European Central Bank for the buybacks. Similarly, UniCredit says payouts are subject to supervisory and shareholder approvals.
After imposing restrictions on dividends for much of the pandemic, Andrea Enria, the ECB’s top banking regulator, signaled that the industry’s plans aren’t excessive. “The largest majority of banks” are expected to stay above relevant capital thresholds even in an “a sufficiently conservative adverse scenario” for the economy and their balance sheets, he said on Wednesday.
Other banks may be less advanced in their efforts to convince the ECB to allow them to buy back more stock.
ING said it’s in “constructive dialog” with the regulator about running down excess capital and will update investors in May.
Deutsche Bank, which has a thinner buffer on top of its minimum requirements, blamed an ongoing regulatory audit of how it calculates risk for its inability to announce fresh buybacks.
Other banks have pledged to boost shareholder returns, even if they have already held big buybacks.
“We have been generating capital organically,” Onur Genc, chief executive officer of Spain’s Banco Bilbao Vizcaya Argentaria SA, told analysts on a conference call last week. “We are determined and clearly dedicated to share that profitable growth with our shareholders.”
Yet the experience of ING, which bought back more than €3.3 billion of stock over the last two years, shows investors are focused on what banks can deliver immediately.
“When you do a share buyback with investors, the typical reaction is ‘that was great, when is the next one?’” Steven van Rijswijk, ING’s CEO, told reporters last week. “Shareholders are an important stakeholder. But we have many other important stakeholders.”
–With assistance from Steven Arons.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.