IMF advises banks to suspend dividend repayment, share buybacks

The International Monetary Fund (IMF) has advised banks to suspend dividend repayment to shareholders during the pandemic.

In an article published on its website, Kristalina Georgieva, IMF managing director, said the decision is necessary to help banks reinforce their capital buffers against the shocks caused by the pandemic.

“As we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested. Having in place strong capital and liquidity positions to support fresh credit will be essential,” she said.

“One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant. IMF staff calculate that the 30 global systemically important banks distributed about $250bn in dividends and share buybacks last year.

“This year they should retain earnings to build capital in the system.”

Although Georgieva said dividend suspension could have unpleasant implications for shareholders, she urged them to view it as a situation where “shareholders who sacrifice now will prosper when growth restarts”.

According to the MD, IMF staff calculations show 30 global systemically important banks distributed about $250bn in dividends and share buybacks in 2019.

“Of course, this has unpleasant implications for shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income,” she said.

“All stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic. Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts — indeed the more profits retained now, the larger the eventual payout

“The public sector is doing what it can to help prevent another banking crisis from happening again. Shareholders have both an interest and an obligation to do the same.”

Banks were also advised to make the decision collectively as investors could penalise banks that take the decision on their own.