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FRANKFURT, Nov 9 (Reuters) – Investors expecting big payouts from euro zone banks may be disappointed as supervisors ask them to preserve capital in the face of a deteriorating economic outlook, sources told Reuters.

Banks such as UniCredit ( CRDI.MI ) and Societe Generale ( SOGN.PA ) have been reporting extraordinary profits and announcing dividends and share buybacks, boosted by a sharp rise in interest rates and a trading boom after more than a decade of mostly meager returns.

But with the euro zone now headed for recession and supervisors urging caution, bankers are likely to find it harder to reward shareholders as generously next year as their buffers capital may be smaller than they now expect, the three supervisory sources said.

The European Central Bank (ECB), which oversees banks in the euro zone, believes some lenders are making overly optimistic assumptions about the economy, based on models that fail to fully capture the damage from the current bout of inflation, they say the sources

An ECB spokesman declined to comment.

European banks boost investor rewards after ECB-imposed COVID restrictions. Source: S&P Global-EBA

Morgan Stanley estimates that euro zone banks will pay 40 billion euros ($40 billion) in dividends in 2022 plus an additional 60 billion euros in share buybacks between this year and next, an outsized return according to recent standards.

But the outlook for future payments is already dimming.

Italy’s Intesa Sanpaolo ( ISP.MI ) has postponed until at least early next year half of the 3.4 billion euro buyback that the ECB approved in June, waiting to see how serious it will be Italy’s economic contraction.

“It’s not a good idea to pay capital during a recession,” Intesa CEO Carlo Messina told analysts last week.

And Sweden’s central bank told the country’s lenders on Wednesday “to be restrictive on large dividend payments and share buybacks.”

This year, the ECB has given the green light to all buybacks that came forward for approval, including those of UniCredit, Societe Generale and ING ( INGA.AS ), one of the sources said.

This provided welcome relief to shareholders who were still suffering from a de facto payment ban at the height of the COVID-19 pandemic in 2020.

But some bankers see the ECB’s buyback approval process as too onerous, industry sources said, adding to their frustration over the ECB’s decision to abandon subsidized lending and perceived intrusion into decisions operative

But the ECB’s top supervisor, Andrea Enria, has also told banks to be cautious going forward and to take the risk of a recession into account when planning future payments.

“There is a worrying dissonance between these positive expectations and the unique mix of risks we currently face,” Enria, who chairs the ECB’s supervisory board, said this week.

Bankers have been struggling, comforted by much larger capital cushions than at the time of the financial crisis and an expected boost in income from rising interest rates.

After setting a hard figure for shareholder remuneration under a plan up to 2024, defying an ECB preference for payout ratios, UniCredit CEO Andrea Orcel even pledged to to match this year’s distribution target of 3.75 billion euros next year.

And Deutsche Bank CFO James von Moltke said on Wednesday that the ECB and other institutions “should move to defend banks to help the economy rather than not”.

But some analysts believe that economic reality, regardless of any demands from supervisors, may change bankers’ minds.

“With the economy entering recession, the time for massive bank payouts is over,” said Marco Troiano, CEO of Scope Ratings. “Reducing capital buffers would weaken banks.”

for the scope ratings

($1 = 0.9945 euros)

Edited by Mark Potter