The European Central Bank told euro zone banks on Friday to skip dividend payments and share buybacks until the start of October at the earliest and use profits instead to boost capital and their ability to withstand losses and to lend.

As measures to fight the pandemic lead to a paralysis of economic activity, banks are on the front line in a battle to keep cash-starved businesses alive.

After rushing to ease capital and bad-loan rules to keep credit flowing, regulators expect banks in turn at least to temporarily withhold shareholder remuneration.

UniCredit, Italy's largest bank by assets, said it was withdrawing a proposal for shareholders to approve a dividend of 63 euro cents per share and authorise a share buyback for up to 467 million euros ($520 million) when they meet on April 9.

The bank said it reserved the right to submit again to shareholders the same proposals after Oct. 1 depending on the ECB review of its recommendation.

The decision not to distribute part of last year's profits as dividends will add 0.37 percentage point to UniCredit's core capital ratio, it said.

The board of rival heavyweight Intesa Sanpaolo meets on Tuesday to discuss the ECB's recommendation.

Following a successful restructuring under Chief Executive Jean Pierre Mustier, UniCredit had been focusing on boosting returns for shareholders through a combination of dividends and buybacks, after shelving plans for a cross-border merger.

The bank said on Feb. 6 it would consider returning 50% of its underlying profit to investors as early as in 2020, reaching a capital distribution threshold it had set for 2023 under a plan unveiled in December.

Since then, however, the coronavirus contagion, which started hitting Italy in late February, has killed almost 10,800 people in the country, out of 97,689 confirmed cases - more than a third of all deaths from the respiratory disease worldwide.

A government ban on all non-essential business activity is set to plunge the Italian economy into a deep recession this year.

UniCredit said it would offer zero-interest loans to banking foundation shareholders for an amount equivalent to the dividend it would not pay in April. Such charitable entities hold in aggregate around 4.5% of UniCredit's capital.

By Valentina Za