Santander Does U-Turn on Scrip Dividend Amid Low Capital Levels

(Bloomberg) -- Banco Santander SA may return to using a scrip dividend a year after saying it would reward shareholders entirely in cash, in a sign that it’s concerned about capital.

Spain’s biggest bank said it would combine any such payout with share repurchases to avoid diluting the existing stock. The lender also decided to increase its medium-term dividend payout target to 40 percent to 50 percent of profit from a previous range of 30 to 40 percent.

The shift is a sign that Santander is under pressure over its capital levels, said Carlos Garcia, an analyst at Kepler Cheuvreux in Madrid. The bank is gearing up for additional hits to its balance sheet this year, including accounting and regulatory changes, he said. Garcia expects the 2019 payout to be in cash and the 2020 dividend to be in shares.

The board proposed keeping the option of a scrip dividend to give it “the required flexibility to be able to take advantage of the opportunities for profitable growth in our markets,” the bank said in a filing late Tuesday.

Santander fell as much as 1.9 percent and was down 1.7 percent as of 9:53 a.m. The bank was the third biggest loser in the Stoxx 600 Banks index.

Santander has one of the lowest core capital levels among its peers, but Chairman Ana Botin has said that’s appropriate for a bank focused on lending, rather than the more volatile business of investment banking. Botin said in March last year that the bank wanted to move to a system of twice-yearly dividend payments in cash from 2019 from the previous structure of four payments of which three are in cash and one in shares or cash.

Santander said its fully-loaded CET1 ratio was 11.3 percent in December 2018. The average for Europe was 13.4 percent in the fourth quarter of 2018, according to Bloomberg data.

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