European financial institutions are on track to distribute an unparalleled amount of dividends and stock repurchases to their shareholders, with estimates suggesting a total of around 120 billion euros ($130 billion) for this year.
This significant return of capital to investors is primarily a result of the substantial profits these banks have accumulated during a period characterized by higher interest rates. This trend represents a major shift in the banking sector's financial dynamics.
In a recent development, the Bank of Ireland has joined a growing list of major banks, including BNP Paribas, Deutsche Bank, and Santander, in announcing an increase in their dividend payouts. This move reflects a broader trend across the European banking sector, where financial institutions are increasingly looking to reward their shareholders as reported by Reuters.
Additionally, Switzerland's UBS has declared its intention to recommence its stock buyback program, while the Italian state-owned bank, Monte dei Paschi di Siena, is set to pay out its first dividend in thirteen years, marking a significant milestone in its financial recovery.
UniCredit, a major player in the European banking industry, has made a bold move by deciding to distribute all of its profits from 2023, which total 8.6 billion euros, to its shareholders. This distribution includes a substantial portion, 5.6 billion euros, allocated for stock buybacks.
Looking ahead, UniCredit has committed to sharing 90% of its net profit for 2024 with its investors, demonstrating a strong commitment to shareholder returns.
Bank of America analysts have provided insights into the broader trend across European banks. They estimate that dividend payouts for the year 2024 will reach nearly 80 billion euros. When combined with stock buybacks, the total capital returns to shareholders are expected to approach 120 billion euros, setting a new record.
In a more extended timeframe, over the next 15 months, which includes both the remaining dividend payments for 2023 and the projected dividends and buybacks for 2024, the total payouts from banks are anticipated to reach 172 billion euros. This sum represents approximately 17% of the total market capitalization of these banks.
The recent profitability of European banks can be attributed to the increased gap between the interest rates they charge borrowers and the rates paid on deposits. This has been a significant turnaround from a period where many banks struggled with low share prices due to near-zero interest rates.
The resulting boost in profits has not only improved their share prices but has also led bank executives to favor dividends and buybacks as the primary methods for deploying excess capital.
UBS analysts have provided projections regarding dividend yields for the top 50 European banks.
They estimate that the dividend yield will be 7.3% in 2024, up from 5.8% in 2022. The yield is expected to experience a slight decrease to 7.2% in 2025, before climbing again to 7.4% in 2026. These projections indicate a favorable environment for investors seeking income from bank stocks.
Despite these positive trends, there remain concerns among investors regarding the valuation of many banks' shares, which continue to trade significantly below their book value.
Additionally, the potential for falling interest rates and a weaker economic outlook poses risks that could impact investor sentiment and the banking sector's performance.
Looking forward, Bank of America analysts expect that the total capital returns from banks will decrease from their record highs starting next year. They predict that the distributions for 2025 will be between 110 and 120 billion euros, indicating a slight pullback from the current levels.
This anticipated reduction is largely attributed to a decrease in the scale of stock buybacks, suggesting a more cautious approach by banks in the face of an evolving economic landscape.
26.02.2024
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