European banks are sitting on record levels of protective capital buffers, allowing them to pay out historic high dividends to shareholders despite growing economic uncertainty, according to a new report.
The European Banking Authority (EBA)’s annual review shows the average Common Equity Tier 1 (CET1) capital ratio across 123 banks reached 16% in June, the highest level since reporting began. This key measure of a bank’s financial strength is well above regulatory minimums, giving lenders a comfortable cushion to absorb potential losses.
EU Banks Report 2022
The report attributes the ample capital levels to stagnating lending volumes, which require less capital to be set aside, combined with rising profitability thanks to higher interest rates boosting net interest income.
See Related: FTX EU Launches Website For Withdrawals Approved By Regulators
Bolstered by these positive metrics, EU banks paid out a record €63 billion in dividends and share buybacks last year. This was a 31% increase over what they had originally budgeted at the start of 2022.
EBA Review And Caution
However, the EBA cautions that the good times may not last as economic growth slows across Europe. Lending is already decreasing in response to higher rates, which could hurt future profitability and asset quality. While problem loans remain near all-time lows for now, risks are emerging in certain real estate markets.
So, while bank shareholders are currently reaping record rewards, clouds appear to be gathering on the horizon. Regulators will likely want lenders to continue building defenses given the uncertain economic outlook rather than ramping up capital returns.
For bank investors, the next year could see a peak in payouts if challenges materialize. But with capital ratios still at healthy levels, European banks seem well prepared to weather approaching storms.
