Swiss banks continued with their generous dividend payments while European rivals were told to hold back throughout the pandemic. Now, signs are on for a change.
Shareholders of Credit Suisse (CS) will sign off on the payment of the second installment of last year's dividend at an extraordinary investor meeting in Friday. It may signal the end of a generous dividend policy. This sounds a tad paradoxical when rivals in Europe are gearing up to resume their payments.
The discrepancy between the dividend policies pursued by Swiss banks and insurers and their European rivals became a cause célèbre in spring when the first wave of the pandemic raged across the continent. The European Central Bank (ECB) had told banks to withhold on such payments, while Swiss regulators seemed happy with the promise by the big two to split their dividends for 2019 into two installments.
Business Remained Brisk Despite the Crisis
Mark Branson, the head of the Swiss financial market regulator, Finma, had urged banks to show restraint given the risk of a liquidity squeeze arising when generous dividends were paid at a time of economic uncertainty. His concern was genuine enough given that nobody knew what the exact consequences of the lockdown would be for an industry such as banking.
Today, the banks can look back with a sense of relief. Of course, some money had to be put aside as cover for company failures – but there was no huge crisis in banking as some had feared. UBS, Switzerland's biggest bank, even had some very positive numbers to show for.
Hence, the payment of the dividends, much loved by Swiss investors, wasn't hanging in the balance for long. Shareholders of UBS have already signed off on them and the owners of Credit Suisse will do so today.
2021 a Year of Change
Both Swiss big banks however plan to change the way they compensate investors. They will reconsider their dividend policies and focus on share buybacks. UBS has already announced its plan to cut back on cash payments to shareholders.
This is mainly due to the difference in shareholder appetite. Share buybacks are said to be more in favor with investors in the U.S. and U.K., where unease about the sub-par share performance of UBS and Credit Suisse has become palpable in recent years.
Failed Attempts at Talking Up the Share Price
The two banks' attempts to get their stock to recover lost ground have foundered in the recent past. Even the highly symbolic purchase of 1 million shares by the ex-CEO of UBS, Sergio Ermotti, was to no avail. This was two years ago and the shares are worth more or less the same today. And Credit Suisse isn't any better off.
While the Swiss plan to shift focus from cash dividends to share buybacks, their European rivals are gearing up for a resumption of dividend payments instead. Yves Mersch, the vice-chair of the European Central Bank's supervisory board, made headlines this week suggesting that banks will be able to resume their dividend payments as long as their capital endowment was plentiful.
Sense of Relief Among European Banks
Time will tell whether Mersch's prediction comes true – he is due to retire from his position in two weeks' time. But the signs are clearly positive, given that Europe has so far avoided a banking crisis and that nobody seems to expect one either. In that sense, the dividend freeze is no longer appropriate.
