The pandemic continues to hit the banking sector. This has been explained by Andrea Enria, president of the Supervisory Board of the European Central Bank (ECB). According to Enria, “the deterioration of economic conditions during the pandemic slowed the pace of the current reduction in non-performing loans.” Furthermore, the ECB diagnoses an “inherent level of distress in loan portfolios that is not yet fully evident.” Thus, phasing out various support measures in 2021 could “increase the risk of abrupt effects.”
According to the ECB, “most entities adequately managed and monitored the risks arising from the COVID-19 pandemic. However, some entities were slow to address the governance challenges related to the pandemic. In addition, there were also problems. referred to credit risk management in internal control functions and sustained structural deficiencies in the field of aggregation and reporting of risk data “.
In this sense, profitability declined in 2020, mainly due to “the increase in impairment flows, the decrease in net interest income and the decrease in fees and commissions.” Consequently, the drop in margins “intensified the pressure on banks to adjust their cost bases, which led to the adoption of a series of cost reduction measures during 2020, such as the consolidation of branches [cierre de oficinas], innovation and telework projects “.
The ECB’s supervisory mechanism understands that “recent events have driven the trend towards the digitization of internal processes, although one in four institutions continues to experience delays in the implementation of these initiatives. Institutions have also responded to the challenges raised by broader strategic reviews or restructuring plans, as well as national consolidation operations [fusión de entidades]. Supervisors have encouraged institutions to carry out these strategic reviews and improve efficiency, and are closely monitoring the implementation of institutions’ strategic measures. ”
After a year of pandemic, the ECB has set the following supervisory priorities for 2021: credit risk, capital soundness, sustainability of the business model and governance.
With regard to credit risk, supervisors will focus “on the adequacy of credit risk measurement and management by institutions, with a view to promoting timely identification, efficient monitoring and mitigation of procyclicality. “. With regard to capital strength, “the EU-wide stress test coordinated by the EBA (European Banking Authority) will be a fundamental factor and an important element to calibrate the capital resistance capacity of institutions, in addition of ongoing supervisory evaluation of its capital planning. ”
Regarding the sustainability of the business model, “the strategic plans of the entities and the underlying measures adopted to correct the existing structural deficiencies will continue to be subjected to critical judgment.” And in terms of internal governance, “oversight will continue to focus on the adequacy of crisis risk management frameworks, risk data aggregation, information technology and cyber risks, as well as entities’ money laundering risks “.
Dividends for Spanish banks
The European Central Bank (ECB) lifted the veto on the distribution of dividends by banks in mid-December. But it did so by applying limitations. Thus, it approved a recommendation that banks take as binding: that banks be “extremely prudent with dividends and share buybacks”, in addition to calling for “extreme moderation in variable remuneration” from managers.
In this sense, the ECB asked banks to consider “not distributing cash dividends or making share buybacks, or limiting such distributions, until September 30, 2021.” In addition, the body chaired by Christine Lagarde stated that “given the persistent uncertainty about the economic impact of the coronavirus pandemic, the ECB expects dividends and share buybacks to remain below 15% of accumulated profit for 2019-20 and do not exceed 20 basis points of capital (Common Capital Ratio Level 1, CET1), whichever is lower. Banks that want to pay dividends or buy back shares must be profitable and have strong capital trajectories, and must refrain from distributing interim dividends charged to your 2021 earnings. ”
The previous recommendation for the temporary suspension of all cash dividends and share buybacks on March 27, 2020, and its subsequent extension on July 28, “reflected the exceptional circumstances that the European economy faced in 2020,” he explains. the ECB: “In reviewing its recommendation, the ECB acknowledges the lower uncertainty in macroeconomic projections. The revised recommendation aims to safeguard the ability of banks to absorb losses and make loans to support the economy. A prudent approach remains necessary, since the impact of the pandemic on banks’ balance sheets has not been fully manifested at a time when banks still benefit from public support measures and considering that credit impairments arrive lagged in time “.
The ECB recommendation will be valid until the end of September 2021. At that time, the ECB intends “to repeal the recommendation and re-evaluate the banks’ capital and distribution plans based on the outcome of the normal supervisory cycle. “.
As a consequence, as published by El País, Santander, BBVA, CaixaBank and Bankinter will distribute that 15% of their profits in dividends for their shareholders, after receiving authorization from the European Central Bank. According to El País, the entities asked for a larger distribution, but the supervisor adhered to its general recommendations given the uncertainty due to the pandemic.