European Banks Boost Payouts With $5 Billion in New Buybacks

(Bloomberg) --

European lenders are boosting shareholder payouts a month after pandemic-related restrictions expired, with more than $5 billion in buybacks announced on Friday.

Spain’s Banco Bilbao Vizcaya Argentaria SA said it obtained regulatory approval to repurchase 3.5 billion euros ($4.1 billion) of shares. BNP Paribas SA will start repurchasing 900 million euros of stock next month. In total, the biggest banks in the euro region are returning almost 23.4 billion euros to shareholders, as bad loans remain in check and higher interest rates promise to lift revenue.

European banks bolstered their profits as the economy’s rebound from the depths of the pandemic drove demand for banking services and taxpayer support helped borrowers avoid default. As executives seek to win back investors after the European Central Bank’s controversial restrictions on payouts ended in September, they’re also pointing to a revenue bump from inflation, which has fueled expectations for higher interest rates.

BNP’s buyback reflects the bank’s “very strong growth” and a “tapering off” of provisions for doubtful loans, as well as its overall capital levels, Lars Machenil, the bank’s chief financial officer, said in an interview with Bloomberg TV.

While the ECB has pushed back against the idea that it will raise its record low rates, markets are factoring in higher borrowing costs. Current market rates are already beginning to help the industry, after years of negative interest rates in Europe, Deutsche Bank AG’s finance chief James von Moltke said Wednesday.

“Should inflation rise further and rates move up further, more benefit for the banks,” von Moltke said in a Bloomberg TV interview. “That’s very helpful after a long period of low and negative interest rates.” 

Based on current interest rates, Deutsche Bank expects to generate an additional 150 million euros in revenue in 2022 compared to estimates it made last year. The lender set aside 641 million euros in the first three quarters of 2021 for dividends to be paid next year.

Still, there are downsides to inflation for banks. For one, higher interest rates could fuel an increase in defaults, as companies grapple with soaring prices and potentially higher borrowing costs after having gotten used to paying next to nothing for their debt.

That could blindside lenders, who are stashing less money for doubtful credit than before the pandemic. Ten of Europe’s biggest banks, including in Switzerland and the U.K., set aside a combined $3.7 billion for bad loans in the third quarter, down 59% from a year earlier, according to calculations by Bloomberg. Four of them actually released reserves on a net basis, bolstering their profits in the period.

And then there’s the direct impact on banks’ bottom line from higher costs for things such as technology and wages. Johan Torgeby, who leads Sweden’s SEB AB, warned last week that the finance industry was already seeing “a lot of anecdotal evidence” that costs are rising for compensation and technology. 

“It’s a war for talent as it has been in other cycles before,” Von Moltke said “We’re finding that we’re competitive in that war for talent. We aim to pay competitively.”

©2021 Bloomberg L.P.