The great European banks recovery cannot last
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The idea that European banks hold too much capital will come as little surprise to their chief executives. The fact that so much would be doled out to investors seems to have caught the market off guard.
Lenders should hand out about €119bn, mostly in dividends, this year — well above historic norms. As a result, the Stoxx Euro Banks index has burst into life since mid-February, up nearly a fifth, far ahead of the broader Stoxx 600. As yet, lenders’ newfound generosity does not look sustainable.
UBS on Tuesday promised $2bn of share buybacks to its investors this year and next. At less than 1 per cent of its market value annualised that is not much compared with the average of more than 4 per cent achieved already, or coming, from European and UK banks, according to Citi estimates.
Some banks really do have too much capital. After a surge in global interest rates, the growth of loans and other risk-adjusted assets on their balance sheets has slowed, though revenues have proved more resilient.
That is enabling some banks to squeeze their balance sheets. Consider UniCredit of Italy. By the end of this year, its risk-weighted assets will have fallen by more than a tenth since 2021. Meanwhile its revenues climbed 29 per cent. By shrinking its balance sheet it expects it will have at least another €8.5bn of excess capital to return to shareholders — 14 per cent of its market value. Its share price has already doubled in the past year.
The result is that banks could offer total payout yields, totting up dividends and buybacks, of about 10 per cent in the next couple of years. Some banks, such as ING of the Netherlands, could even beat that, with a 15 per cent total yield. UBS, on the other hand, will need to fully integrate Credit Suisse first and may be more parsimonious.
The trouble is, this level of payouts does not look sustainable. True, the “inflation” of regulatory capital in Europe and the UK is coming to an end. Theoretically, any organic growth in capital (from profits) can go to shareholders.
But some of this should also go to expanding a bank’s business, as well as maintaining buffers. Handing out 70 to 80 per cent of earnings, as the sector plans to do this year and next, means less retained capital for investment. That payout figure has been closer to 45 per cent over the past decade.
Europe’s banks’ promise of huge yields is attracting investors to a previously moribund industry. Once loan books start to grow again, their generosity will surely fade.
Comments