AS THE GLOOM of second lockdowns descends on Europe, a hint of autumn cheer is coming from an unexpected source. Its banks, which started reporting third-quarter results in late October, are in perkier shape than might have been supposed, given the economic cost of the pandemic. Second-quarter losses have turned into third-quarter profits. Many bosses are eager to resume paying dividends, which regulators in effect banned in March, when covid-19 first struck earlier in the year. (Technically, they “recommended” that payments be halted.) On November 11th Sweden became the first country to suggest that it might let payouts resume next year, should its economy continue to stabilise and banks stay profitable. Do bankers elsewhere—and their shareholders—also have reason to hope?

Banks’ better-than-expected performance is due to three factors: solid revenues, a drop in provisions, and healthier capital ratios. Start with revenues. Some banks took advantage of volatile markets by cashing in on surging bond and currency trading: BNP Paribas, France’s biggest bank, reported a net quarterly profit of €1.9bn ($2.2bn), after a 36% jump in fixed-income trading fees; those at Crédit Agricole, the second-biggest, soared by 27%. Some have done nicely from mortgages. Although low interest rates are squeezing overall lending margins, they also allow banks to earn more on housing loans, because the interest rates they charge to homebuyers fall more slowly than their own funding costs. It also helps that housing markets have remained lively, in part because white-collar workers, expecting homeworking to become normal, have headed for greenery in the suburbs.

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But the return to profit owes just as much to the second factor: a sharp quarterly drop in new loan-loss provisions—the capital banks set aside for loans they reckon might soon sour. Provisions are calculated by models based mainly on GDP and unemployment forecasts. Those indicators have not been as bad as feared, so banks had no need of a big top-up to their rainy-day funds. Meanwhile, continued government support has helped keep households and firms afloat, so realised loan losses have remained low. On November 11th ABN Amro, a Dutch bank, reported a net third-quarter profit of €301m, three times analysts’ predictions, after loan impairments came in at €270m, just over half of what the pundits had expected. That contributed to the third feel-good factor: core capital ratios well above those announced at half-year. Put simply, banks have thicker buffers against further economic stress.

Granted, not everything looks bright. On November 9th Société Générale, another French bank, said it would slash 640 jobs, mainly at its investment-banking unit. Along with cuts announced in recent days by Santander, of Spain, and ING, of the Netherlands, this took the total job cuts this year to more than 75,000, according to Bloomberg, on track to beat last year’s 80,000.

Nonetheless bank bosses argue that they have reason enough to tell their long-suffering investors to expect a dividend next year. They cannot wait to part with the money. The share prices of British and euro-zone banks have struggled since the Bank of England and the European Central Bank (ECB) asked them to stop payouts. Investors, who typically buy bank shares to pocket a stable, recurring income that they can redirect towards fast-growing stocks, like tech, have little sympathy. That makes banks less safe rather than more, says Ronit Ghose of Citigroup, a bank. If they are in investors’ bad books, they can hardly raise fresh equity on capital markets.

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Regulators face a difficult choice. On the one hand, euro-area banks passed the ECB’s latest stress test with flying colours, which suggests that extending the ban may be excessively cautious. On the other, regulators worry that renewed government support, amid renewed lockdowns, is only postponing a reckoning until next year. The ECB estimates that in a severe but plausible scenario, in which the euro area’s GDP falls by more than 12% in 2020 and grows by only 3-4% in 2021 and 2022, banks’ non-performing loans could hit €1.4trn, well above the levels reached during the global financial crisis of 2007-09 and the zone’s sovereign-debt crisis in 2010-12.

Despite the hint from Sweden (which is not in the euro area), that suggests the broad ban will stay for some time, in some form. “The debate is still swirling,” says Jon Peace of Credit Suisse, another bank. Regulators may extend the ban for a short period, say three months. Although many banks are not due to pay their next dividend until May, that could sink their shares further.

Another option would be to allow banks to pay dividends conditionally—if, say, they stay in profit this year. Or, like their American counterparts, supervisors could cap rather than halt payouts. Bank bosses too will probably be pragmatic, seeking only small distributions to shareholders. On October 27th Noel Quinn, the boss of HSBC, Europe’s largest bank by assets, said it was considering a “conservative” dividend, having cancelled it for the first time in 74 years in March. Investors breathed a sigh of relief.

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But regulators do not seem convinced. On November 9th, at a webinar hosted by the Peterson Institute for International Economics, a think-tank, Andrea Enria, the ECB’s supervisor-in-chief, said he did not believe that the “recommendation” not to pay dividends put European banks at a disadvantage. He hinted that it would remain until the extent of eventual losses became clearer. “We have closed schools, we have closed factories,” he said. “I don’t see why we shouldn’t have paused also in this area.”

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Via The Economist