Bank of Spain Extends Limit on Lender's Cash Dividends

The Bank of Spain extended its limit on lenders’ cash dividends, rolling over an existing cap in line with recommendations from the International Monetary Fund.

The recommended maximum of 25 percent, introduced in June last year, should be applied through year end to 2014 earnings, the central bank said in an e-mail today. The guideline allowed exceptions for highly capitalized banks and urged lenders paying shareholders with new stock to temper the practice.

The IMF, which helped monitor Spain’s 41 billion-euro ($56 billion) European bank bailout, said this week the cap on cash dividends should remain to ensure lenders had enough capital to be able to support the economic recovery by providing credit. Banks, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest, use so-called scrip dividends, that allow them to pay shareholders with new stock.

The Bank of Spain urged lenders to restrain the practice of paying shareholders with stock, so that total payouts are sustainable in the medium term and can be made entirely in cash in the future. The limit on cash dividends would be waived in exceptional cases of lenders with a capital ratio of more than 11.5 percent under the CET1 measure that the European Central Bank will use in its assessments of banks this year.

BBVA, Spain’s second-largest lender, plans to pay two cash dividends and two scrip dividends this year, even as the lender will ask shareholders to authorize four scrip dividends to allow more flexibility, Chief Operating Officer Angel Cano told an earnings webcast last month. Santander plans four scrip dividends on 2014 earnings, amounting to 0.6 euro cents.

Bailout Program

Spain’s bank bailout program ended in January, and the government is already taking steps to start the privatization of Bankia, the lender whose collapse pushed the government to seek European aid. The economy emerged from a two-year recession in the third quarter, even as lending continues to contract.

Private-sector deleveraging and fiscal consolidation will remain “headwinds for growth for some time,” the Washington-based IMF said. It recommended the dividend cap so that banks didn’t have to support capital ratios by cutting credit. Non-performing loans in the Spanish banking industry rose to a record 13.6 percent of lending in December as total lending shrank.

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