Europe bank payouts capped as capital bar keeps rising

Reuters

* Banks improved capital ratios by average 36 bps in Q3

* Dampens hopes for early dividend jump, now seen in 2015

* Banks fret over litigation costs, regulatory demands

* 12 pct common equity, 20 pct total capital could be norm

By Steve Slater

LONDON, Nov 21 (Reuters) - Shareholders' expectations forbank dividends have declined after lenders ramped up capitallevels in the third quarter, spooked by a mega fine against JPMorgan and spiralling regulatory demands.

Major banks including Credit Suisse, UBS and Deutsche Bank either specifically set aside morefor litigation costs or rebuilt capital at one of the fastestrates since the financial crisis in the last quarter, cuttingthe payout pool for yield-hungry investors.

Banks are keen to lift their dividends after cuts followingthe financial crisis, but a big jump in payouts may now bedelayed until 2015 from a previously-hoped-for 2014.

"Banks have to maintain or strengthen their capital ratios.They want to pay dividends to shareholders and if they have topay fines, something has to give," Alain Stangroome, head ofgroup capital planning at HSBC, said at the Thomson Reuters IFRconference on bank capital on Thursday.

The prospect of a record $13 billion deal between JP Morganand U.S. authorities to settle investigations into the sale ofmortgage debt encouraged European rivals to set aside more cashto cover misconduct risk. The settlement, the largest levied ona single firm, was confirmed this week.

"The (conduct and litigation cost) numbers have lost thecapacity to shock and we've seen an arms race in terms of thenumbers involved," said John-Paul Crutchley, analyst at UBS.

As well as larger fines for misconduct, regulators inSwitzerland, Britain, Sweden and elsewhere are ratcheting upcapital requirements to avert a replay of the financial crisis.

The regulatory squeeze saw banks get their balance sheetsinto better shape in the July-September period and that trend isexpected to continue in the fourth quarter.

Europe's banks raised their core Tier 1 capital ratios, thecentral measure of a bank's financial strength, by 36 basispoints (bps) on average in the third quarter, lifting theirincrease in the past year to 105 bps, said analysts at Barclays.

Credit Suisse's core capital jumped by 100 basis bps in thelatest quarter, while rival UBS increased its ratio by 70 bpsand there were increases of 60 bps at HSBC and 46 bpsat Spain's Santander.

Nordic banks, already better capitalised than most Europeanrivals, extended that gap as core capital ratios at SEB and Handelsbanken rose by 100 bps or more.

The way banks report can vary but capital levels havebroadly doubled since the 2007/08 crisis, helped by emergencycashcalls and cuts to dividends.

"NEW GOLD STANDARD"

Some regulators have signalled they may move further to"gold-plate" national capital standards, meaning that investorswill generally expect banks to hold common equity of 12 percentof their risk-weighted assets, compared to 7 percent underincoming global rules, and a total capital ratio of 20 percent.

"Twelve and 20 ... that seems to be becoming the new goldstandard," said Simon McGeary, MD of new products at Citi.

Royal Bank of Scotland bumped up its target for corecapital to 12 percent from 10 percent earlier this month.

Switzerland's finance minister said banks there could need aleverage ratio of 6-10 percent, more than double the globalstandard, and UBS was hit with a temporary top-up of capital itholds for potential legal and compliance costs.

Britain is finalising plans that look set to ramp up capitaldemands, Stockholm is also increasing pressure on its banks andan upcoming review of the quality of assets across eurozonebanks are further reasons for a conservative approach.

"The unpredictability quotient on regulation has risen...which makes it difficult for banks to have as much confidence asthey'd like that they won't fall foul of regulatory change at alater date," said Mike Harrison, analyst at Barclays.

Many banks are still expected to raise their dividends -including HSBC, BNP Paribas, UBS and Nordea - butinvestors may need to wait until 2015 for big increases.

Analysts at Credit Suisse have forecast UBS's dividend yieldwill rise to 3.8 percent in 2015 from 1.2 percent in 2013.

Yields at Nordea should nudge to 7.7 percent in 2015 from6.1 percent this year, HSBC's should rise to 6.8 percent from5.5 percent and SocGen to 5.9 percent from 2.1 percent over thesame period, according to the Credit Suisse forecast.

U.S. rivals have also been keen on raising dividends andbuying back more stock, but their distribution plans have beenunder strict scrutiny from the Federal Reserve. The regulatorcan approve or reject plans and a handful - including Citi and Bank of America - have had plans rejected.

For Spain's banks, the balance sheet scrutiny and theprospect of stricter definitions of capital adds to the need forthem to cut payouts, analysts said.

Payouts to Spanish retail shareholders, who are alsotypically customers, is important to many banks, but Santander -which paid out more than 200 percent of its profits in dividendlast year - is expected to follow BBVA, which has cut thisyear's dividend and capped next year's payouts.

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