European banks promise high dividends in low-yield world

By Steve Slater

LONDON, Aug 9 (Reuters) - European banks redoubled theircommitment to raise dividends this results season, determined todemonstrate to investors that they have put the financial crisisbehind them.

The ability to pay a dividend has become a badge of honouramong banks since regulators raised the bar on capitalrequirements in recent months, requiring some lenders to issueequity or bonds or to sell assets to shore up their ratios.

Barclays softened the blow of a 5.8 billion poundrights issue with a pledge to pay shareholders more than 3billion pounds a year by distributing 30-50 percent of earningscompared with a previous pledge of 30 percent.

"In banking, where having capital is so precious, paying adividend is far more important as a signal of health than it isin other industries," said Simon Maughan, analyst at OlivetreeSecurities.

With interest rates set to remain close to zero in theeuro-zone and Britain, any stock paying a dividend that yields 4percent or more is an attractive option for wealthy individuals,pension funds and retail investors, as well as income investorswho pick stocks primarily for their dividend.

Swedbank, HSBC, Standard Chartered, BNP Paribas and Nordea are allexpected to deliver a 4 percent or more yield this year.

Shares in Lloyds, UBS and SocieteGenerale all rallied in the last two weeks on hopesthey will ramp up payouts next year.

"We are moving in the direction of capital returns, which isa sign of increasing normality after such a long period ofcapital injections and state intervention," said Amit Goel,analyst at Credit Suisse in London.

With loan growth muted, banks have some leeway to increasedividends. Raising payouts is also a way for banks with surpluscapital to boost their return on equity, by reducing the capitalreturns are based on, although few are yet in that position.

Indeed, meeting capital requirements remains the crux of howfar and how quickly banks lift payouts.

UBS, Credit Suisse and Deutsche Bank all said they want to lift dividends, but all stayed cautious inlight of tougher leverage ratio rules.

UBS's strong capital generation got investors excited,however. Its core capital jumped to 11.2 percent from 10.1percent just three months earlier, and the bank will add up to90 basis points from buying back a fund of its toxic assets.

It plans to pay out more than half its earnings in dividendswhen its core capital gets above 13 percent, which could see itpay 1.75 Swiss francs per share for 2015, according to analystsat Morgan Stanley, equivalent to a yield of 10 percent.

ZERO TO 70 IN THREE YEARS

Several British, French and Scandinavian banks were bullishon payouts, including part-nationalised Lloyds, whose sharessurged after progress in its turnaround left it able to starttalks with regulators about restarting its dividend, which ithas not been able to pay since being bailed out in 2008.

Lloyds could pay a final dividend for this year in early2014, and should see payouts increase to 4 pence a share for2015, analysts reckon, which would be a yield of over 5 percent.

That would see it distributing 50-70 percent of its earningsin dividends, higher than most rivals, and is seen as a keyselling point to new potential investors as Britain prepares tosell down its 39 percent stake.

Lloyds paid out just over half of its profit in dividends in2005 and 2006 and the shares yielded 6.5-7 percent.

"Lloyds will be a high dividend bank stock in the futurebecause a small portion of our earnings will be necessary tosustain loan growth, and all the rest ... will be able to flowinto shareholders," Lloyds Chief Executive Antonio Horta-Osoriosaid. "We'll see how much in due time."

Buoyant results from France's Societe Generale pave the wayfor higher dividends and sparked a jump in its shares. CEOFrederic Oudea said SocGen's payout ratio was likely to risefrom 25 percent this year to 35-50 percent in 2014.

Dividends across the industry slumped during the financialcrisis, but analysts at Barclays forecast payouts by 28 ofEurope's top lenders will rise to more than 32 billion eurosnext year, up 50 percent from last year's level but almost athird below the peak in 2007.

Some see the dividend optimism as overdone, however. Bankswill need to keep lofty capital levels and face ongoingregulatory headwinds and continue to deal with a raft of legacyissues, including Lloyds.

And while the prospect Lloyds could pay out 70 percent ofits profits excited investors, not everyone was impressed.

"Payout ratios of around 70 percent suggest the business isex-growth, because you're giving almost the entire thing back toyour shareholders," HSBC CEO Stuart Gulliver said.