Article 2(3) of the Regulation (EU) 241/2014 stipulates that any foreseeable dividend which can be expected to be paid out from the interim/year-end profit has to be deducted from the amount of interim/year-end profits to be included in Common Equity Tier 1. 

Article 2(4) of Regulation (EU) No 241/2014 provides that “Before the management body has formally taken a decision or proposed a decision to the relevant body on the distribution of dividends, the amount of foreseeable dividends to be deducted by institutions from the interim or year-end profits shall equal the amount of interim or year-end profits multiplied by the dividend payout ratio”.  

In accordance with Article 2(7) of Regulation (EU) No 241/2014, “In the absence of an approved dividend policy, or when, in the opinion of the competent authority, it is likely that the institution will not apply its dividend policy or this policy is not a prudent basis upon which to determine the amount of deduction, the dividend pay-out ratio shall be based on the highest of the following: 

(a) the average dividend pay-out ratio over the three years prior to the year under consideration 

(b) the dividend pay-out ratio of the year preceding the year under consideration.” 

In case the amount of dividends to be deducted from the interim or year-end profits needs to be calculated on the basis of the average pay-out ratio pursuant Article 2(7)(a) of Regulation (EU) 241/2014, it is not clear from this Article how exactly the “the average dividend pay-out ratio over the three years” should be calculated, i.e., simple average or weighted average.  

In our view, if the year under consideration for the inclusion of interim profit is t, two calculations can be made in this context: 

Option A  

Assuming that the bank is computing the average dividend pay-out ratio over the three years preceding the year under consideration as a simple average of dividend pay-out ratios, this would imply that the calculation of the average dividend pay-out ratio would be as follows:  

where:  

payout ratio _t-n: shall be calculated for each of the years t-1 to t-3 as the sum of distributions related to total Common Equity Tier 1 instruments over the relevant year t-n, divided by the sum of profits related to the year t-n;  

and 

profits _t-n: shall mean the amount reported in row 670 of template 2 of Annex III to Commission Implementing Regulation (EU) 2021/451 related to year t-n, or, where applicable, the final amount reported in row 670 of template 2 of Annex IV to that Implementing Regulation related to the year t-n with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013.  

Option B  

If the bank is computing the average dividend pay-out ratio over the three years preceding the year under consideration as a weighted average of dividend pay-out ratios, this would imply that the calculation of the average dividend pay-out ratio would be as follows:  

 where:  

dividend _t-n: shall mean for each of the years t-1 to t-3 the sum of distributions related to total Common Equity Tier 1 instruments over the relevant year t-n;   

and 

profit_t-n: shall mean the amount reported in row 670 of template 2 of Annex III to  Commission Implementing Regulation (EU) 2021/451 related to the year t-n, or, where applicable, the final amount reported in row 670 of template 2 of Annex IV to that Implementing Regulation related to year t-n with regard to supervisory reporting of institutions according to Regulation (EU) No 575/2013.  

Furthermore, when calculating the pay-out ratio in accordance with Article 2(7)(a) and (b) of Regulation (EU) 241/2014, if an input pay-out ratio used for those calculations is higher than 100%, an additional question is if an institution might either: 

1. In application of Article 2(7)(a) of Regulation (EU) 241/2014, limit the input pay-out ratio to 100%. This would imply that e.g., in case the institution has pay-out ratios of 80% (t-3), 120% (t-2) and 90%, (t-1), for the purposes of the calculation under letter (a) of Article 2(7) of Regulation (EU) 241/2014 the institution would use 80% (t-3), 100% (t-2) and 90% (t-1) as relevant pay-out ratios. This issue arises only if a simple average under Option A is used; or 

2. limit the outcome pay-out ratio to 100%. This would imply that only if the calculation of the average pay-out ratio under letter (a) or of the pay-out ratio under letter (b) of Article 2(7) of Regulation (EU) 241/2014 resulted in a pay-out ratio that is higher than 100%, the result would be capped to 100%.