European banks: Ukraine´s crisis and shareholders remuneration plans

Andrea Enria, Chair of the Supervisory Board of the European Central bank (ECB) analyzes the situation of the European banks in light of the Ukraine war. In his view, European banks are resilient so far, their Russian exposures are manageable overall, although the indirect impacts and the escalation of the sanctions have been reflected in a downward revision of the GDP 2022-23 and in a substantial upward revision of inflation for 2022 in the euro area. In this scenario, the ECB assesses banks’ remuneration plans to shareholders on an individual basis and expects they should be anchored to sound bank-specific capital planning and were publicly announced after having a dialogue with the supervisor.

Key messages from the Andrea Enria´s presentation during the Morgan Stanley European Financials Conference:

• Resilience of European Banks: At the end of 2021 European banks enjoyed a robust macroeconomic outlook, a solid capital and liquidity position (CET1 at 15.5 on average and LCR at 173.8), a reasonable asset quality in a post Covid context (NPL at 2.2%), a rebound in profitability ratios (ROE at 7.2%) and overall positive lending dynamics. All these factors together have supported the resilience of European banks during the Invasion of Ukraine shock.
   
• European Banks’s direct exposures to Russia of credit, securities and derivatives appear contained although there are other indirect channel of impact such as exposure through non-banking financial institutions,  a potential Russian-sovereign default scenario, a broader financial markets volatility that could  trigger counterparty credit risk or cyber risks attacks. None of these indirect risks have been disruptive so far.
   
• Shareholder’s remuneration plans: The ECB assesses banks’ distribution of profit on an individual basis and it is neutral on cash dividends vs. share buy-backs:
  - Distributions to shareholders should be anchored to sound capital planning under credible baseline and severe institution-specific adverse scenarios.
  - Banks can distribute cash dividends after the supervisory dialogue.
  - Share buy-backs require an ex-ante authorization by the supervisor within three months.
  - Banks should clearly distinguish in their disclosures the ordinary component of distributions from the extraordinary distribution of excess capital and should not set their dividend policies in terms of absolute amounts.