Banks under spotlight over dividends

Eurozone banks should be encouraged to keep more of their profits rather than pay dividends, to bolster their capital, and finance new loans, the head of research of the Bank of International Settlements said yesterday.

The eurozone has been battling low economic growth and sluggish lending for years, and banks have complained that rising capital requirements — the obligation to hold funds against loans and other exposures — are curbing their ability to extend credit.

Hyun Song Shin, head of research at BIS, the Swiss-based forum of major central banks, said it was in the public interest for banks to hold more of their earnings, because better-capitalised companies can fund themselves more cheaply and, therefore, are in a better position to lend.

The comments could put the focus on Bank of Ireland which has advanced plans to resume paying some sort of dividend based on next year’s earnings. However, Fiona Hayes, chief economist and head financial analyst at Cantor Fitzgerald Ireland, said that Bank of Ireland “has plenty of room to pay dividends” and that the new comments from the BIS will unlikely affect the bank, or affect the timing of any sale in shares in its rival, Allied Irish Banks.

Bank of Ireland shares were little changed yesterday at 25 cent. Amid the Europe-wide sell-off, they have however slumped from 39 cent in August last year.

Eurozone banks paid €196bn in dividends from 2007 to 2014, or roughly 43% of their profits, according to BIS data for 90 lenders incorporated in the currency bloc. That means they failed to make full use of their “most important source” of capital, Mr Shin said — their retained earnings. Spanish, French, and Italian banks in the group paid out more than they retained, data showed.

“Banks have paid out substantial cash dividends, even in those regions where bank lending may not be sufficient to support recovery of economic activity after the crisis,” Mr Shin told an audience of ECB officials and economists in Frankfurt. “This should be of concern to central bankers in pursuit of their monetary policy, as well as their financial stability mandates,”

Mr Shin’s comments were based on a BIS study, also published on Thursday, showing that a 1 percentage point increase in the ratio between a bank’s equity and its total assets is associated with a 4 basis point reduction in its borrowing cost and a 0.6 percentage point lending increase.

Bank supervisors such as the ECB have the power to stop banks from paying dividends, bonuses and certain bond coupons if their capital falls below the regulatory minimum.

Reuters and Irish Examiner staff