Pandemic led to the distribution of 800 million dividends in Portugal – Observer
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The pandemic led central banks to first prevent and then limit the distribution of dividends by institutions. As a result, as mentioned in the financial stability report, released this Monday by the Bank of Portugal, “in September 2020, the total dividends, referring to 2019 results, will not have been distributed, will have reached around 26 billion euros in the euro area and 800 million euros in Portugal”.
However, and already after lifting restrictions on dividend payments this year, Caixa Geral de Depósitos paid 300 million in extraordinary activation to the Portuguese State in November, after having paid 83.6 million in the middle of the year.
Banco de Portugal emphasizes, on the other hand, in the same report, that “despite these dividends having remained unpaid”, it does not exclude the possibility that banks may, in the near future, distribute an amount of dividends that may offset as withheld. Microeconomic evidence suggests that, on average, banks that followed the recommendations reduced lending less and increased bank provisions that were not affected by the recommendations more.”
Restrictions on the distribution of dividends were lifted in September this year, but Banco de Portugal continues to warn that “the distribution of dividends must be done with prudence, reflecting the challenges faced by the banking sector”. Despite not having extended these restrictions, the supervisory institutions (ECB and Banco de Portugal), as supervised institutions “must ensure that they are retained in their own right to face a possible deterioration in the quality of assets, thus preserving the financing of the economy. . The microprudential supervisory authorities will carry out a case-by-case follow-up”.
Mário Centeno, at a press conference for the presentation of the report that talks about the risks for the banking sector, highlighted that there are some indicators of increase in the record of deterioration in credit quality throughout this period, even though it is “a contained increase”. But he added that caution is needed, as the final impact is not yet known.
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Moratoriums and their effects, namely at the level of bad debt, are one of the risks pointed out for national banks in this financial stability report.
In which we are already talking about and the possibility of an increase in interest rates that have positive and negative effects for banks. Given that they weigh on both sides of the scale, Mário Centeno refuses to “put a sign on that equation”, not least because it will depend on each case and the degree of exposure of banks to the negative side and what they manage to recover on the positive side. “It’s a matter of evolution, it depends a lot from situation to situation”. That is why the governor of Banco de Portugal prefers to keep the reserve on the rise in interest rates, which are more positive or more negative for Portuguese banks, but “I would not disregard the positive effects”.
If, on the one hand, a rise in interest rates allows banks to improve their margins and profitability, on the other they can lead to rises in public debt rates and, also, a rise in rates, “if not accompanied by an economic recovery , can also translate into situations of increased credit risk materialization”.
The rise in these rates may have “impact on the devaluation of financial assets in the portfolio, with emphasis on public debt”, even though banks have been reducing their exposure to sober debt. Luís Laginha de Sousa, director of Banco de Portugal who also presents the report, believes that there are mitigating factors for this exposure. In addition to the reduction in exposure, a mitigating factor is that “a large part of the debt is registered at amortized cost, banks do not have to recognize the adjustments in the debt price, only when it is sold”. But, “we keep analyzing what could happen”. And it quantifies: if there was an increase in income at 100 basis points along the grade curve of government bonds in Portugal, Spain and Italy, the impact would be 0.8 percentage points on the banks’ Tier 1 capital ratio.
The Portuguese banking system’s solvency levels stabilized in the first half of 2021. In June 2021, the total own funds ratio stood at 17.8%, decreasing 0.1 percentage points compared to December 2020. the Tier 1 Core Funds (CET1) and Tier 2 Core Funds (T2) will remain unchanged.
This non-distribution of dividends also contributed to this. “The ratio of total own funds increased by 0.9 pp between December 2019 and June 2021, partly reflecting the growth of CET 1, via retained earnings”.