Bonuses, Dividends Pit Europe Banks Against Economic Wardens

(Bloomberg) -- Judging by its largest banks, you’d hardly know Europe was in the grip of a worsening pandemic.

The biggest banks in the region set aside in the third quarter the least amount of money for doubtful loans since the onset of the coronavirus -- at a combined $8.6 billion, it’s a fifth of the $39.8 billion provisioned in the first half. At the same time, banks including Spain’s Banco Santander SA and France’s BNP Paribas SA are touting financial strength to lobby regulators to restart dividends while the likes of Deutsche Bank AG are making a case for bigger bonuses for bond traders who raked in bumper revenue.

The tone struck by Europe’s lenders is in stark contrast with a deteriorating backdrop of new infections and restrictions that threatens to bring more economic pain. Coming at a time when taxpayer money is being used to soften the impact of lockdowns that could bankrupt companies and throw millions out of jobs, the dissonance risks putting bankers on a collision course with regulators.

“We’re in a very negative situation full of uncertainty and now is not the time to lift the dividend ban,” said Antonella Sciarrone Alibrandi, a professor at the School of Banking, Finance and Insurance at the Università Cattolica del Sacro Cuore in Milan. “There’s a sort of contradiction in how banks are calling for flexibility in regulation and the provisioning for bad loans while simultaneously asking to be allowed to resume dividend payments and large bonuses.”

Like their European counterparts, the top 10 U.S. banks lowered combined provisions for bad loans to $6.5 billion in the quarter from $76.3 billion in the first half. While lenders say they have adequate cover, investors aren’t piling in. Financial stocks on both sides of the pond remain laggards this year. Banks are the worst-hit sector in Europe, after energy.

After their greed was blamed for the 2008 credit crunch, bankers sought to be part of the solution during the pandemic by lending to paralyzed companies, rather than focusing solely on returns. Lenders were given unprecedented regulatory relief, with measures freeing up capital to absorb losses or fund loans.

On Thursday, European Central Bank President Christine Lagarde reminded banks that its support came with strings attached. They need to help finance all sectors of the economy “not just the large corporate accounts,” she said, pointing to the worsening economic situation in the region. She warned that some lenders are providing companies with credit on less beneficial terms and that higher risk perceptions could weigh on banks’ willingness to lend.

“Credit risk is the top priority right now,” Andrea Enria, the ECB’s top banking watchdog, said at a conference on Wednesday, advising banks not wait until the situation deteriorates to identify customers who will run into distress.

The buildup in reserves in the first half and a slight bump in economic activity over the summer may have emboldened banks to cut provisions. While bankers may have been cheered by the pandemic-fueled trading boom and the interest they’re earning on low-risk state-backed loans, they face challenging times ahead.

“It is a question of when, not if, banks’ asset quality will deteriorate in this crisis,” Bank of Spain Governor Pablo Hernandez De Cos said. “A resurgence in Covid-19 cases coupled with the unwinding of support measures could further magnify the crystallization of bank losses.”

Still, the economy may fare better in the new round of lockdowns because construction and manufacturing companies will keep operating while many in the services industry have gotten to grips with working from home, BNP Chief Financial Officer Lars Machenil said in a Bloomberg TV interview.

Europe’s banks say they’re doing their job and that regulators who want to penalize them could make things worse by undermining investor confidence.

“Since the pandemic started we increased the lending, we provide liquidity all across the board,” Santander Chief Executive Officer Jose Antonio Alvarez told analysts on a call on Wednesday. “We continued to generate results and based on this we are asking them (the ECB) to allow us to pay dividends.”

BNP, Barclays Plc, Standard Chartered Plc and HSBC Holdings Plc have also cited their financial health to start paying dividends again next year. Swiss banks UBS Group AG and Credit Suisse Group AG want to boost shareholders returns in 2021, pledging a combined more than $3.0 billion of buybacks.

The ECB and the Bank of England are set to review their de-facto bans on shareholder payouts at the end of the year. The top Swiss banks got an easier ride from their regulator, agreeing to split their payments in two this year. The U.S. Federal Reserve capped dividends rather than banning them.

“The banks look extremely good at the moment because governments take the biggest burden of the crisis,” Joerg de Vries-Hippen, chief investment officer of Allianz Global Investors, said in a Bloomberg TV interview on Thursday. “I would be very cautious as a politician or as the ECB to go that way and allow them now already to pay dividends, even if they wish that step.”

While bonuses account for a smaller share of bank capital outflows than dividends, they’ve been a controversial topic since 2008. In March, the BoE called on U.K. banks not to pay cash bonuses to senior staff. The ECB has said it expects lenders in the euro area to exercise “extreme moderation” on variable pay to conserve capital.

That potentially puts securities firms on collision course with regulators. Deutsche Bank said on Wednesday that it had been accruing funds to pay bonuses in line with its stellar trading performance.

“A company like ours needs to be able to pay for competitive performance,” CFO James von Moltke said in a Bloomberg TV interview.

Credit Suisse Chief Executive Officer Thomas Gottstein defended the bank’s move to set aside higher amounts for compensation, saying on a call with journalists that it “needs to strike a balance between pay for performance and the overall Covid-19 environment.”

Bankers aren’t blind to the turmoil ahead, but it’s the restrictions on society imposed by governments that will stop the health crisis from mutating into a financial crisis, said Philipp Hildebrand, vice chairman of BlackRock Inc.

“I don’t see any banker who is sanguine in the current environment,” Hildebrand said in a Bloomberg TV interview on Thursday. “It’s the cumulative loss of GDP that’s going to determine how big this impact will be and how big a potential impact on the balance sheet will be in terms of losses going forward.”

©2020 Bloomberg L.P.