EU bank dividend stars may fall back to earth

Published Fri, Feb 26 20163:41 PM EST

Breakingviews

Robert Cyran

Investors shouldn't get starry-eyed about European lenders bearing dividends. A return to distributions may be a message of confidence to shareholders starved of income following years of banks using profit to boost equity and gratify regulators. But market conditions may puncture this year's euphoria. Exhibit A is Erste Group . The Austrian bank has vowed to pay out 22 percent of 2015 earnings after either paying no dividend or failing to fully cover it from earnings in three of the previous four years. Results on Friday showed full-year revenue had fallen as costs rose. On that basis it's hard to see how dividends can be sustainable, let alone grow. A saving grace is that Erste hasn't set a hard target for future payouts. Lloyds Banking Group looks healthier – the UK lender managed to increase its net interest margin (NIM) last year and is guiding to another bump for 2016. It also increased its dividend from an admittedly token level last year. But Lloyds is pushing back a profitability target by a year, implying that it too will eventually feel the pain. And France's Societe Generale upped its dividend despite weak fourth-quarter results. More from Breakingviews : Deutsche Boerse and LSE try to create Brexit hedge The common problem is that of low policy rates that could turn negative. Banks make most of their money by paying out less in interest to savers than they charge for lending. NIMs, which capture the difference, are under pressure at most banks. Erste's fell from 2.65 percent to 2.59 percent last year. The bank that is playing it more carefully is Royal Bank of Scotland . RBS said on Friday that it probably wouldn't be able to restart payments until sometime after a previous estimate of the first quarter of 2017, even though its NIM was flat on the previous year. While some of RBS's problems are idiosyncratic – it's finding it fiddly to hive off its Williams & Glyn unit in order to satisfy European state rescue rules – its Irish subsidiary Ulster Bank, saw its NIM fall 35 basis points. And another obstacle, litigation, is common to rivals. Read More The Kashkari trade: Time to buy bank stocks? RBS shares got savaged on the morning of Feb. 26, while Lloyds' soared the day before on its dividend news. Yet the division of European banks into dividend haves and have-nots is not the whole story. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

Royal Bank of Scotland

Spencer Platt | Getty Images

Investors shouldn't get starry-eyed about European lenders bearing dividends.

A return to distributions may be a message of confidence to shareholders starved of income following years of banks using profit to boost equity and gratify regulators. But market conditions may puncture this year's euphoria.

Exhibit A is Erste Group. The Austrian bank has vowed to pay out 22 percent of 2015 earnings after either paying no dividend or failing to fully cover it from earnings in three of the previous four years.