The story about banks and their dividends has received a new chapter: the European Central Bank extended the freeze on dividends for European banks by three months. What does this mean for their Swiss rivals?
A year without a dividend is the horror of any shareholder. And still, this is the reality for investors in European banking stocks. The European Central Bank (ECB) at the beginning of the week told the industry to extend the freeze on dividends until the end of January 2021, by three months.
The reason for the ECB’s decision was to strengthen the industry’s resilience in the face of an unprecedented economic slump and to prevent banks from lowering their lending to the real economy.
Liberal Swiss – Strict Europeans
The strict position taken by the ECB has weighed on the stocks of European banks this year. The Stoxx Europe banking index is down a third, which compares unfavorably to the broader index’ 10 percent fall, as the «Financial Times» reported on Tuesday (behind paywall).
So how about the Swiss position? The authorities are much more liberal in their approach. Finma, the regulator, in spring urged banks to show some restraint and threatened those who didn’t to withhold the easing of capital requirements offered in connection with the pandemic.
Swiss Solution
While Credit Suisse and UBS initially resisted, they succumbed to the pressure in April and agreed to pay their dividends in installments – finews.com reported on their decisions. UBS for instance will pay its dividend for 2019 of $0.73 in two installments. Finma welcomed this decision explicitly.
This Swiss solution seems not to have paid off in equal measure though. The bigger of the two, UBS, is down about 10 percent compared with the beginning of the year, while Credit Suisse trades about a quarter down from seven months ago.
No Further Steps Expected
While observers say that the U.K. is likely to follow the lead of the ECB in this instance, there are no signs of further action to be expected in Switzerland.
Finma told finews.com that it had nothing to add in respect to this question, referring to the decisions and communication made earlier this year. This suggests that Bern doesn’t see an urgent need to take further action.
Sergio Ermotti's Plea
Which is very much in tune with what UBS CEO Sergio Ermotti believes. The «FT» quoted him as follows: «Share buybacks have been demonized way too much. 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.»
Hence, the bank plans to spend about $3.6 billion out of its cash reserves on dividends and buybacks. Before the end of this year, it is worth adding.
UBS – the Dividend Monster
One needs to add just how much investors in banks like UBS have suffered in recent years. The shares never recovered from the slump during the financial crisis and haven’t even remotely reached the levels of before the crisis.
With this year’s dividend payment, UBS at least makes the stock worth having in a portfolio: the return of about 6 percent is among the very best on the Swiss Market Index of the biggest stocks. Obviously, Ermotti isn’t keen on giving up this one trump card.
Who knows, the liberal Swiss way toward the handling of cash dividends may eventually help the stocks of UBS and Credit Suisse compared with European rivals, if investors realize that they can get a handsome cash dividend and profit from a stable currency at the same time.
