BIS suspends dividend to prepare for further Covid-19 strains

The Bank for International Settlements says it has coped well with the coronavirus pandemic, but it has chosen not to pay a dividend for the first time since 1950.

The Covid-19 crisis has tested the BIS’s innovation strategy and put severe pressure on its banking department, it says in its annual report. The pandemic reached the BIS’s Hong Kong office first, where workers moved to split teams in late January. Staff in Basel and Mexico moved to split teams in March, but soon the majority of staff were working from home, including senior managers.

A core part of the BIS’s innovation strategy, launched in 2019 by general manager Agustín Carstens, is a technological upgrade. Parts of this were accelerated during the Covid-19 crisis, the BIS’s 2020 annual report says. Around 900 pieces of hardware were distributed to BIS staff, helping it move banking services and other essential operations to remote working.

“These measures allowed almost the entire staff to shift to remote working from the second week of March without any major disruptions,” the BIS says.

Writing in the introduction to the report, Carstens says these “significant” investments in IT proved “invaluable” for the BIS’s response to the crisis. “We will be building further on this,” he adds. “These efforts include a continued commitment to enhancing our cyber resilience.”

Markets disrupted

The crisis put major pressure on the BIS’s banking services but they “continued as normal” throughout the disruption, the report says. The BIS offers deposits, foreign exchange and gold trading, and asset management services to central banks and other official sector bodies. It also manages its own sizeable pool of assets.

Like many other banks, the BIS benefitted from a rapid rise in transaction volumes in March, though it also suffered losses in the widespread market sell-off that accompanied the pandemic.

BIS traders were stretched during the period, catering both to central bank customers and implementing a “continuous rebalancing” of the BIS’s own portfolio. The BIS’s holdings came under strain from widening credit spreads and foreign exchange swap spreads.

Net profits had climbed as high as 500 million special drawing rights ($690 million) by the start of this year, the report says. They recorded a brief loss during the most intense phase of the crisis, before recovering to an annual profit of SDR165.5 million by the end of March.

Though the figure was substantially smaller than the SDR461 million profit in 2018–19, unrealised gains on gold holdings pushed total comprehensive income to SDR1.6 billion at the end of March – more than double the previous year’s figure. The BIS also says the rapid market recovery since March has helped it recoup most of its shortfall in profits.

Early indications suggest the new strategy helped cushion the blow. “We have developed new capabilities to support increased diversification of our investments and have expanded our range of products and services tailored to the needs of central banks,” says Carstens.

The strategy has seen a “moderate increase” in the BIS’s risk-return profile and some diversification of its assets. The BIS “selectively increased” the duration of its own-funds portfolio and added new assets including US agency mortgage-backed securities, investment-grade corporate bonds and unhedged sovereign debt of “select” emerging market sovereigns. “On net”, these assets “supported own funds performance” during the market turmoil, the BIS says.

Under Carstens, the BIS has sought to grow its deposit base and it succeeded in the past year. Currency deposits grew by SDR8.6 billion and gold by SDR3.9 billion.

No dividend

The BIS has opted not to pay its central bank shareholders a dividend this year. The original targeted dividend would have resulted in a payout of 86% of net profit, “well outside” the standard range.

While the BIS notes it could pay a smaller dividend, its policy stipulates it must maintain an “exceptionally strong” capital position. Retaining the profit would help meet “potential demands” on the balance sheet in the coming months, “while preserving its financial strength” in case the pandemic worsens.

“While this would be the first time that the BIS has not paid a dividend since 1950, it is a response to the highly unusual circumstances,” the BIS says.

If the pandemic is brought under control and the global economy stabilises, the BIS says it expects profits to be “high” in 2020–21, which could allow it to pay a “supplementary dividend” next year.