European banks promise high dividends in low-yield world
LONDON Aug 9 (Reuters) - European banks redoubled their commitment to raise dividends this results season, determined to demonstrate to investors that they have put the financial crisis behind them.
The ability to pay a dividend has become a badge of honour among banks since regulators raised the bar on capital requirements in recent months, requiring some lenders to issue equity or bonds or to sell assets to shore up their ratios.
Barclays softened the blow of a 5.8 billion pound rights issue with a pledge to pay shareholders more than 3 billion pounds a year by distributing 30-50 percent of earnings compared with a previous pledge of 30 percent.
"In banking, where having capital is so precious, paying a dividend is far more important as a signal of health than it is in other industries," said Simon Maughan, analyst at Olivetree Securities.
With interest rates set to remain close to zero in the euro-zone and Britain, any stock paying a dividend that yields 4 percent or more is an attractive option for wealthy individuals, pension funds and retail investors, as well as income investors who pick stocks primarily for their dividend.
Swedbank, HSBC, Standard Chartered , BNP Paribas and Nordea are all expected to deliver a 4 percent or more yield this year.
Shares in Lloyds, UBS and Societe Generale all rallied in the last two weeks on hopes they will ramp up payouts next year.
"We are moving in the direction of capital returns, which is a sign of increasing normality after such a long period of capital injections and state intervention," said Amit Goel, analyst at Credit Suisse in London.
With loan growth muted, banks have some leeway to increase dividends. Raising payouts is also a way for banks with surplus capital to boost their return on equity, by reducing the capital returns are based on, although few are yet in that position.
Indeed, meeting capital requirements remains the crux of how far and how quickly banks lift payouts.
UBS, Credit Suisse and Deutsche Bank all said they want to lift dividends, but all stayed cautious in light of tougher leverage ratio rules.
UBS's strong capital generation got investors excited, however. Its core capital jumped to 11.2 percent from 10.1 percent just three months earlier, and the bank will add up to 90 basis points from buying back a fund of its toxic assets.
It plans to pay out more than half its earnings in dividends when its core capital gets above 13 percent, which could see it pay 1.75 Swiss francs per share for 2015, according to analysts at Morgan Stanley, equivalent to a yield of 10 percent.
ZERO TO 70 IN THREE YEARS
Several British, French and Scandinavian banks were bullish on payouts, including part-nationalised Lloyds, whose shares surged after progress in its turnaround left it able to start talks with regulators about restarting its dividend, which it has not been able to pay since being bailed out in 2008.
Lloyds could pay a final dividend for this year in early 2014, and should see payouts increase to 4 pence a share for 2015, analysts reckon, which would be a yield of over 5 percent.
That would see it distributing 50-70 percent of its earnings in dividends, higher than most rivals, and is seen as a key selling point to new potential investors as Britain prepares to sell down its 39 percent stake.
Lloyds paid out just over half of its profit in dividends in 2005 and 2006 and the shares yielded 6.5-7 percent.
"Lloyds will be a high dividend bank stock in the future because a small portion of our earnings will be necessary to sustain loan growth, and all the rest ... will be able to flow into shareholders," Lloyds Chief Executive Antonio Horta-Osorio said. "We'll see how much in due time."
Buoyant results from France's Societe Generale pave the way for higher dividends and sparked a jump in its shares. CEO Frederic Oudea said SocGen's payout ratio was likely to rise from 25 percent this year to 35-50 percent in 2014.
Dividends across the industry slumped during the financial crisis, but analysts at Barclays forecast payouts by 28 of Europe's top lenders will rise to more than 32 billion euros next year, up 50 percent from last year's level but almost a third below the peak in 2007.
Some see the dividend optimism as overdone, however. Banks will need to keep lofty capital levels and face ongoing regulatory headwinds and continue to deal with a raft of legacy issues, including Lloyds.
And while the prospect Lloyds could pay out 70 percent of its profits excited investors, not everyone was impressed.
"Payout ratios of around 70 percent suggest the business is ex-growth, because you're giving almost the entire thing back to your shareholders," HSBC CEO Stuart Gulliver said.
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