The second wave of the pandemic has hit Switzerland and at the same time, the big banks are giving notice that they are about to pay out the dividends they withheld in spring. The issue is controversial, but only abroad.

UBS has already announced as much, arch-rival (CS) will follow suit later this week, while Switzerland's biggest private bank, Julius Baer is holding an extraordinary general meeting on November 2 with the topic being the second installment of the dividend. And it is not just the Swiss banks that are on the case. On Tuesday, Anglo-Chinese giant HSBC announced that it will pay a dividend this year.

In spring, Switzerland and the rest of Europe was hit by the first wave of the coronavirus. Cities, regions, and nations were closed down, with the economy and society affected in equal measure.

Strong Banks Are Delaying

Concern was that the economic crisis might develop into a financial crisis, and regulators urged banks to show restraint as they faced the scenario of bad loans on their books. Mark Branson, head of the Swiss financial market regulator, Finma, said at the time that strong firms that decided to restrict or delay their dividends would stay strong for longer, in the interest of their customers.

The European Central Bank (ECB) was equally adamant that banks in the EU should pay no dividends until at least October 1, 2020, and also abstain from buying back shares.

Dividends Cut in Half

The banks heeded the call: UBS decided to pay its dividend for 2019 of $0.73 in two installments. First, a dividend of $0.365 per share, plus a special dividend reserve of another $0.365 per share, to be issued in the autumn after an extraordinary general meeting.

Credit Suisse also cut the payment in two. Instead of 0.2776 francs per share, it gave its shareholders 0.1388 francs per share in spring, with the other half due in the autumn. Julius Baer paid one-half of 1.50 francs per share in May and the other in November, if circumstances don't change dramatically.

The Second Wave Is Upon Us

The first wave is over, and following a relatively calm and relaxed summer, the second wave has caught up with the country.

Jan-Egbert Sturm, head of the economic group of experts at the national coronavirus task force, told the media on Tuesday that the economic slowdown would come about irrespective of the measures that Switzerland would take to contain the outbreak. The potential consequences are a severe increase in bankruptcies, which could hurt banks eventually.

ECB Urges Restraint

The question is whether it makes much sense to pay out dividends and thereby weaken the capital base of the banks at this time of great uncertainty.

The answer clearly depends on the perspective one takes. The ECB for one is adamant that any such payments should be delayed until the year 2021, even if the stress-tests revealed nothing undue of note.

Finma Is Optimistic

Finma however sees no problem with the payments of second installments, as a spokesman confirmed in an interview with finews.com. The situation on the financial market may still be fragile, and the uncertainties with respect to the medium-term economic impact of Covid-19 remained high.

But in principle, Finma considers Swiss finance to be robust and sound. The stress-tests have shown that the capital endowment was adequate even for severe economic crisis scenarios. Finma therefore has no objections to banks paying out their deferred dividends, the spokesman said.

Solid Swiss Banks

If one looks closely at the performance of the banks, nothing would speak in favor of withholding the dividends. The quarterly report by UBS was outstanding, with a pretax profit of $2.6 billion, an increase of a whopping 92 percent over the year-earlier period.

The core-capital-ratio (CET1) has added more than 70 basis points to 13.5 percent over the last two periods. That allows the Swiss No. 1 to not only pay out its planned dividend but also to plan a reserve of $1.5 billion for share buybacks starting 2021.

Credit Suisse will publish the third-quarter report on Thursday. In the second quarter, it had managed to increase its capital.

Signalwirkung fraglich

Nothing seems to stand in the way of paying out the dividends. But the banks should at least consider what image they present in doing so.

If bankruptcies were to increase during the second wave and unemployment reaches a new high, popular opinion might quickly swing against the industry if banks at the same are paying handsome dividends to their shareholders.

Let's just hope it doesn't become such a bleak autumn and winter.