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UBS and Credit Suisse divide the 2019 dividend into two tranches. This is a multifaceted decision that has been preceded by many discussions.
Dividend reduction: a difficult issue for large banks.
There was apparently a lengthy discussion before the two big banks UBS and Credit Suisse (CS) decided to split their dividends for fiscal year 2019 into two tranches. Half of the distribution will be received by shareholders this spring, the other half in the fall, provided investors agree to the institutes’ plans at an extraordinary general meeting.
Just don’t disturb investors
More than other companies, banks struggle to lose the dividend. Such a move quickly scares bondholders and savers; They suspect that something is wrong with the financial institution and that it is preparing for an emergency scenario.
The expectation of financial market regulator Finma that banks should follow a prudent dividend policy has caused hectic activity among financial institutions. This became even greater as more and more European institutions complied with the request of the European Central Bank (ECB) to waive distributions until at least October 1.
UBS in particular found a great dilemma. Given that he does relatively few stock buybacks and pays a high cash dividend, his situation was more awkward than that of Credit Suisse (CS), which has recently shifted the peso towards buybacks – after all, the 2019 dividend for the Switzerland’s largest bank is 2.6 billion. $, while the CS is only CHF 678 million. By contrast, the CS planned to buy back its own shares for CHF 1 to 1.5 billion this year.
UBS and CS in step
But for now, nothing will come of it. As early as March, Finma had asked banks to refrain from buying again. Such a measure sounds reasonable in today’s environment and hardly makes waves. It would have been more difficult for banks to communicate a dividend exemption. In the case of UBS, investors would have wondered why the bank is now suddenly withholding the high sum of $ 2.6 billion after management has repeatedly emphasized how strong the company is.
Apparently Finma was aware of this problem. In any case, in the past two weeks the authority has often remarkably emphasized how well Swiss banks are endowed with capital and how well they have implemented the strictest capital requirements since 2008.
It would still have been a problem for UBS if it had had to announce a dividend split out of nowhere and as the only bank. Surprisingly, CS is now taking the same step despite much lower pay, and communicating it at the same time as the big competitor. In this way, tours of both institutes can save face and investors remain calm. And it seems that the action between UBS, CS and Finma has been agreed.
Of course, it can be argued forever whether it is wise for banks to be paying dividends. UBS and CS certainly want to keep their shareholders happy with a distribution after their share prices fell sharply in the wake of the crown pandemic. In this sense, the main Swiss banks do not want to fall behind the American houses. These distribute the dividend quarterly so that the shareholders already have the 2019 distribution.
Unlike many industrial companies, the two big banks are not in a moral dilemma. Until now, they have not been paid short-term work, while countless companies in other sectors receive that money and are not afraid of paying a dividend.
On the other hand, nobody knows what dimensions the economic crisis caused by the pandemic will take. Bank managers still believe that the current crisis mainly affects the so-called real economy. In this way, the crisis differs from that of 2008, when the banks had existential problems through their own fault and for a long time did not want to perceive the disaster.
As evidence, UBS announced ahead of time that it expects to make a net profit of $ 1.5 billion in the first quarter. However, it could have shaken the financial sector much more if central banks had not massively expanded financing programs in favor of banks and the financial market.
The ZKB sails back into the slipstream
Surprisingly, such a controversial discussion doesn’t have to worry a heavy bank: as so often in previous years, the Zürcher Kantonalbank (ZKB) navigates through turbulent times without getting on the radar. Hardly anyone asks the critical question whether the small and large bank ZKB should distribute a dividend as it intends to.
Of course, the canton of Zurich and the municipalities are careful not to instigate such a discussion. And ZKB chief Martin Scholl said in an interview with the NZZ that the public sector now depends on the distribution of its bank. Like UBS and Credit Suisse, the ZKB is a systemically important institution, and would also be affected if there were a long and severe recession.
