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At The Financial Times, Greg Baer makes the case against banning bank dividends. He writes:
Leaving aside its putative benefits, a blanket dividend ban imposed outside the current regulatory framework would come with a substantial cost. It would make it difficult for investors to value banks, and thereby make them decidedly less investable. Investors might logically prefer companies whose boards of directors retain authority to maximise value for shareholders, so long as all regulatory requirements are met.
This would continue a worrisome trend. The market value of US banks, relative to their book value, has fallen over the past 10 years due to a variety of factors, including heightened regulation. As a result, US banks included in the S&P 500 index are trading at an average of 1.1 times their tangible book value — compared with 9.9 times for the index as a whole.
At this point, then, the big attraction to investors of highly regulated banks is the ability to produce a stable stream of dividends. If that ability were taken away arbitrarily, the investment case would become difficult to understand.
Moreover, the European and UK experience provides no support for the US following suit. While US banks in 2019 accomplished approximately 73 per cent of capital distributions through share repurchases and only 27 per cent through dividends, European banks distributed 4 per cent through buybacks and 96 per cent through dividends. Large US banks have already announced a voluntary halt to share repurchases through the second quarter.
More importantly, the European and UK experience may serve as a cautionary tale. The UK’s Prudential Regulation Authority announced its dividend ban on March 31, which increased the combined book value of UK banks by about £8bn. But at the opening of markets the following day, the market value of the relevant UK banks fell by £35bn, or £43bn including the lost dividends, despite broader equity markets being generally flat. So: eight steps forwards, 43 steps backwards. UK and European banks now trade at an average of just 0.4 times their tangible book value.
In short, those advocating for government-mandated halts to dividends appear to have adopted an “if it ain’t broke, let’s break it” approach. While perhaps politically expedient, such an approach is bad policy and a repudiation of the good work that both banks and their regulators have done since the last financial crisis.
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