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European banks are on track to return more than €120 billion to shareholders on the back of their 2023 results, as they pass on the benefits of higher interest rates to investors.
The bosses of European lenders are under pressure to boost their valuations and win over investors, who have been spooked by dividend bans and windfall taxes across the continent in recent years.
Europe's largest listed banks pledged €74 billion in dividends and €47 billion in share buybacks, a 54 percent increase on capital returns in the previous year and far higher than in every year since at least 2007, according to figures compiled by UBS Bank.
Buybacks have been the biggest source of growth over the past three years, with buybacks worth just a few billion euros annually across the top 50 banks in the years up to 2020.
Since then, European banks have taken advantage of their strong earnings on the back of rapidly rising interest rates to buy back stocks at lower prices.
Investors welcomed the capital returns with caution. “Banks need high yield and sustainable yield,” said Antonio Roman, portfolio manager at Axiom's European Bank Equity Fund. “We have high returns, but there is a question mark about sustainability.”
The capital returns represent a stark reversal from four years ago, when the European Central Bank ordered lenders to freeze dividends and share buybacks at the start of the Covid-19 outbreak, a decision that tarnished the sector's reputation among international investors.
European lenders have received a €100 billion windfall over the past two years thanks to the difference between the interest they pay on deposits and the interest they receive on loans, known as net interest income.
Among the most eye-catching dividend announcements this year is Italy's UniCredit, which promised to pay €8.6 billion – its total dividend for 2023 – to investors. Barclays on Monday pledged to return £10 billion to shareholders over the next three years, while Standard Chartered said on Friday it would return $5 billion over the same period.
But analysts have warned that the level of shareholder returns will start to decline next year, with central banks cutting interest rates and lenders forced to look for other revenue lines.
“Banks have been significantly increasing returns of capital to shareholders, but this may be as good as it gets,” said Mislav Matejka, an analyst at JP Morgan. “The regulator may not overlook a more investor-friendly cash distribution in the future.”
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European regulators have become more relaxed about share buybacks over the past two years as banks have built up strong capital levels, but they are understandably uncomfortable with shareholder returns that are larger than banks' annual profits.
This month, UBS also said it would increase its dividend by 27 percent to 70 cents per share in May and buy back up to $1 billion in shares in 2024. Its capital return program was paused when it agreed to buy Credit Bank. Swiss last spring.
“Over the past few years, the European banking sector has significantly improved its profitability, reduced risk and rebuilt its capital base to levels that far exceed regulatory requirements,” said Lars Vorberg, managing partner at Cevian Capital, an activist investor who recently built a capital base. . A €1.2 billion stake in UBS
“But overall, the sector is evaluated as worse than it was before, not better.”
Spain's Santander Bank and Deutsche Bank, Germany's largest bank, both announced plans to increase shareholder returns in recent weeks, while Italy's state-backed Monte dei Paschi di Siena reported its first profit in 13 years.
