European banks are poised to enter the upcoming year with only a slightly reduced capital buffer, indicating their ability to sustain recent dividend distributions despite regulatory directives for increased reserves.
According to calculations by Bloomberg, the top 10 banks that have disclosed their regulatory-mandated capital needs for the next year currently maintain an excess of €141.8 billion ($153 billion) beyond the required threshold. This is a marginal decrease from the €146.5 billion reported last year, even considering substantial shareholder payouts during the same period.
The capacity to reward investors remains pivotal for an industry grappling with prolonged low valuations, especially as windfall profits from higher interest rates dwindle and regulatory authorities urge banks to brace for more challenging economic conditions. Recent years have witnessed heightened tensions over this matter, with some bankers expressing dissatisfaction with the European Central Bank’s perceived tight control, despite the lifting of a de facto ban on payouts imposed during the pandemic.
Disclosures from the 10 banks reveal that national regulators are instructing these institutions to bolster their counter-cyclical buffers, anticipating a deteriorating economic climate. The ECB, identifying deficiencies, has set a higher bar for individual banks. Consequently, the group’s average capital requirement has returned to pre-pandemic levels.
While banks seldom explicitly outline the drivers behind their ECB requirements, reports suggest that Credit Agricole SA faces a capital add-on for its leveraged finance business.
Recent reports indicate that some officials on the ECB’s Supervisory Board are advocating for more lenient payout policies in the coming year, attributing the poor valuations of the region’s lenders, in part, to restrictions imposed by the central bank.
Even if a more relaxed regulatory environment is adopted, banks are unlikely to distribute the entirety of their excess capital. They need to retain funds to meet undisclosed additional demands from the ECB and typically allocate some of the surplus for business investments.
Among the banks, BNP Paribas SA boasts the highest level of excess capital, partially derived from the sale of a US unit. The proceeds were utilized for share buybacks, technological upgrades, and modest acquisitions. Similarly, ING Groep NV has returned approximately €21 billion to investors since 2018, concurrently investing in growth initiatives and operational efficiency.
In a notable shift, the ECB is now imposing additional requirements for another capital metric, the leverage ratio. Societe Generale SA of France and Commerzbank AG of Germany experienced an increase in this requirement as dictated by the ECB.
