Dividends and buybacks should remain below 15% of cumulated 2019-2020 profit.

The European Central Bank (ECB) recommended yesterday that banks exercise extreme prudence on dividends and share buy-backs. To this end, the ECB asked all banks to consider not distributing any cash dividends or conducting share buy-backs, or to limit such distributions, until 30 September 2021. The recommendation also reflects an assessment of the stability of the financial system and was made in close cooperation with the European Systemic Risk Board.

The ECB said that the continent’s banks should keep dividends and share repurchases to less than 15% of profit for 2019 and 2020, or 0.2% of their CET 1, whichever is lower.

The previous recommendation for a temporary suspension of all cash dividends and share buy-backs of 27 March 2020 (and its subsequent extension on 28 July) reflected the exceptional and challenging circumstances which the European economy faced in 2020.

The revised recommendation aims to safeguard banks’ capacity to absorb losses and lend to support the economy. A continued prudent approach remains necessary, as the impact of the pandemic on banks’ balance sheets has not manifested itself in full at a time when banks are still benefiting from several public support measures, and considering that credit impairments come with a temporal lag.

What does this mean for NLB’s dividend payment?

As a reminder, NLB medium target dividend payout ratio until 2023 is set at 70%, while the company generated a net profit to majority of EUR 193.6m. Under the assumption of cost of risk ending the year at 150 bps, such a payment would infer a potential dividend of EUR 1.9 per share (DY 4.2%) according to our first estimates. We note that there is a real possibility that cost of risk will be below the estimated 150bps which would further boost the bottom line.