European banks/UBS: servants of the state
The real reason lenders should not splash the cash right now is that it looks bad
The multi-layered nightmare of horror movies, where the dreamer “awakes” to fresh ordeals, is a reality for Europe’s lenders. Governments bailed out their sector during the financial crisis, heralding a long era of austerity. Now coronavirus has prompted politicians and central bankers to relax standards — and demand further payback.
Banks must lend to imperilled business and — within the eurozone at least — suspend dividends. The conflicted relationship between lenders and the state will become even more torturous.
The Euro Stoxx banks index dropped 6 per cent, according to S&P Global, after the European Central Bank called for lenders to shelve payout decisions until October. The stock of ING fell almost 8 per cent, followed by the likes of ABN Amro, UniCredit and Intesa Sanpaolo.
That leaves many shares trading on depressed multiples of 0.2-0.5 times tangible book value. But “apparent widespread value is illusory”, according to Berenberg analyst Eoin Mullany. Just before the rout, he calculated that the sector’s consensus earnings multiple would theoretically double to an unrealistic 9 times if likely loan losses were fully discounted.
Lex labelled European banks as bad investments before the pandemic, for reasons the outbreak illustrates. These institutions operate in a risky interzone between the public and private sectors.
No big lender currently needs to withhold dividends to bolster financial strength. There is an argument for conserving liquidity, lest a financial market black swan flaps its wings. But the real reason European banks — including UK ones — should not splash cash right now is that it looks bad.
UBS is going ahead anyway, despite guidance from Switzerland’s government and banking regulator to limit payouts. One argument is that retail and corporate banking contribute less than a quarter of divisional profits dominated by wealth management. Even so, it is a brave move.
Peers who follow official policies will still face recriminations of their own. They bear some of the burden of implementing government loan and guarantee schemes intended to prop up failing businesses. Banks can expect brickbats if bailouts go badly.
Lenders certainly will not make real profits from them. Margins on state-sanctioned loans will be slim and offset by a share of defaults, the greater tranche of which taxpayers will cover.
You cannot be half pregnant. But if you work for a European bank, you can be half civil servant.