Distribution Support for AT1s

TwentyFour Blog

Yesterday the ECB released their guidance to banks regarding shareholder distributions. They have reiterated that banks should exercise extreme moderation on variable remuneration (bonus payments) and have set limits for dividend payments to equity holders and prudence on any share buy-back schemes.

In effect the ECB has guided all banks to refrain from dividend payments or share buy-backs until 30th September 2021. In the event that a bank does go ahead with a distribution the ECB has set a ceiling of the lower of a) 15% of the cumulative profit for 2019/20 or b) no higher than 0.2% of the current CET1 ratio. The Supervisory team also guide banks to refrain from any interim dividends paid out from 2021 profits.

This is more prudent than most bank analysts had been predicting and more punitive than the recent PRA directive to UK banks which specify distributions can be a maximum of 0.2% of RWAs (risk weighted assets) or 25% of cumulative eight-quarter profits covering 2019/20 (after deducting any shareholder distributions). 

This curtailment of distribution is aimed at keeping banks well capitalised in order to support the wider economy. It may be frustrating to equity holders but for the investors in AT1 bank capital bonds this announcement will help to keep buffer capital at healthy levels and should therefore be viewed as supportive for the sub-sector.