Published on 17 November 2020


2020 dividends: the second wave of covid-19 could dampen bank expectations

The third-quarter rebound in the economy that followed the end of the first lockdown, enabled banks to improve their results. With a stronger balance sheet and profits in their pockets, they want to be able to pay dividends to their shareholders –  an indispensable condition for remaining appealing to investors. But the second wave of the pandemic poses a new risk, and the European Central Bank is calling for caution.

Bourse Coronavirus 2
With improved results in the third quarter, several European banks would like to be able to pay dividends.

Controversy over dividends has resurfaced. The strong third-quarter rebound in the economy allowed companies to perform better than expected. This is the case for banks such as BNP Paribas, which published its results on November 3rd. It recorded a net profit of more than €1.8 billion, instead of the €1.5 billion anticipated by analysts. Shareholders hope to have a cut of this profit. For its part, BNP Paribas has set aside half of its profits in anticipation of distributing them to shareholders.

But the second wave of COVID-19 risks dampening their expectations. In its Global Financial Stability Report published in October, the International Monetary Fund (IMF) was very cautious about the global economy and seemed to prefer that banks preserve their capital for a few more months. This is a bad sign for banks that would like to take care of their investors and continue to appeal to them. The more investors want to buy shares in the company, the higher the stock market price.

2020: a lost year for bank dividends

Since the beginning of 2020, bank shareholders have not been rewarded for their investment. In the first wave, the European Central Bank (ECB) – the supervisory body for European banking – strongly advised banks against paying dividends. The ECB asked banks to wait until the fall, and then at the end of July, extended this period until January 2021.

According to the ECB, the reason for this is the economic risk posed to banks' balance sheets due to the pandemic. If the economy suffers, the banks - which finance businesses and households - will necessarily suffer too. Thus, they will need all the liquidity available to deal with this challenge. Nevertheless, the ECB’s position on this issue is temporary and should be reviewed on December 10th, with French and European banks pinning their hopes on it.

But this prospect could drift away as the second wave pushes the European continent into lockdown once again. On the other hand, groups which are not subject to the ECB’s recommendations and have not received state aid, want their shareholders to benefit from the third-quarter rebound. As a result, Total – which recovered as a result of a more sustained barrel neckline – has announced that it is maintaining its dividend and will even make an advanced payment.

Arnaud Dumas

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