Dividends Under Threat: ECB’s Caution Weighs on Bank Stocks as MPS Faces Scrutiny

ECB’s Call for Caution on Dividends and Buybacks

Recent reports suggest that the European Central Bank (ECB) may soon be advising banks in the Eurozone to exercise greater caution regarding dividend payments and buyback operations.
According to an article from Il Sole 24 Ore, this could likely be the case.

While a complete ban, reminiscent of the more intense periods during the Covid-19 pandemic, is not on the table, there seems to be an expectation that financial institutions should start considering future challenges with a prudent approach to shareholder remuneration.
The ECB would certainly welcome such a move.

Details about specific recommendations from the ECB remain sparse.
The newspaper indicates that the ECB may follow a similar approach as in previous years, reviewing each bank individually within the SREP processes, suggesting where moderation in distributions and buybacks is necessary.

Market Reactions and Impact on Italian Banks

As a result, Italian banking stocks are experiencing a downturn today, driven by these emerging concerns.

Particularly hard-hit are the shares of MPS (Monte dei Paschi di Siena), leading declines in the FTSE MIB index.
Other major Italian banks such as UniCredit, Intesa SanPaolo, Banco BPM, and Bper are also facing stock price pressures.

Market analysts are increasingly worried that the ECB could announce a tightening of rules regarding dividends paid by Eurozone banks to their shareholders.

Rising Interest Rates and Bank Profitability

It’s essential to highlight that following continuous interest rate hikes throughout 2022-2023, the ECB has played a pivotal role in boosting the profitability of banks.
This has resulted in a more generous dividend policy, with UniCredit emerging as a standout performer amid the influx of dividends.

Piazza Gae Aulenti has gained a reputation for exceptional dividend distributions, leading Bloomberg to describe it as a money-making machine.

Future Risks and ECB’s Role

Nonetheless, there have been ongoing whispers warning that the ECB might urge banks not to overspend on dividend distributions, instead encouraging them to set aside reserves for unforeseen challenges ahead.

This caution stems from a broader need to ensure banks take advantage of favorable conditions, driven by the ECB’s ongoing restrictive monetary policy, to build a buffer against sudden and unpredictable events like the Covid-19 pandemic and the ongoing conflict in Ukraine.

Given the current climate of uncertainty, it is not surprising that the ECB may begin scrutinizing individual banks’ capital distribution policies, potentially reasserting its recommendation for caution.

MPS Under Pressure Amid Rumors

In the specific case of MPS, its shares are feeling the weight of speculation that has dissipated since last week, alongside discussions about possible white knights interested in the bank.

A significant setback occurred last Friday when LMDV Capital, an investment company led by Leonardo Maria Del Vecchio, publicly denied any involvement with MPS, countering previous claims of interest.

Additionally, Banca Finint also refuted rumors of potential participation by entrepreneurial families or institutional investors in acquiring stakes in MPS, further deflating the latest wave of speculation.