Banks are still paying dividends, but for how long?

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Most banks in the United States remain bullish about their ability to pay dividends to investors during the coronavirus pandemic, even as their European counterparts halted such payments for the rest of the year.

But just how long that optimism persists depends on the speed of the nation’s economic recovery and the outcome of federal stress tests that determine how well big banks would weather a severe financial crisis.

So far, a handful of small and midsize banks have reduced their dividends in the 11 weeks since COVID-19 was declared a global pandemic by the World Health Organization. None of the largest banks have cut their payments, but the Federal Reserve Board has supplemented its stress-test regimen to reflect the current economic crisis. Some observers suspect that could mean banks will be forced to cut their dividends to satisfy regulators’ capital demands.

“It’s hard to say what’s going to happen,” said Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods who covers big banks. “But for [smaller] banks, part of what they do will be dictated by what the bigger banks do. If all of a sudden there are banks that have to turn off that dividend, it could trickle down … just because other banks did it and to keep regulators happy.”

Dividend payouts at big banks, 2020 forecast

Bank dividend payments continue to face pressure as bank stock prices remain low, loan-loss reserves rise and fears mount about the length and severity of the recession caused by the COVID-19 health crisis. To date at least six banks — including Hanmi Financial and PacWest Bancorp, both in Los Angeles — have reduced their quarterly dividends.

At the same time, analysts say that San Francisco-based Wells Fargo did not earn enough in the first quarter to cover the dividend payment for the quarter. The $1.9 trillion-asset bank with an extremely high payout ratio still managed to pay a very small dividend by tapping capital reserves, but investors worry that the bank will need to cut its dividend later in the year if revenue challenges and rising credit costs continue to weigh on the bank’s earnings.

Unlike in European Union and the United Kingdom, where bank dividends were put on hold two months ago after regulators pressured banks to suspend dividends in order to support lending and build reserves, similar calls in the U.S. have gone unheard. Banks in Europe and the U.K. typically pay dividends once or twice a year, not quarterly as U.S. banks do.

Now anticipation is growing about how the nation’s largest banks will perform on the Fed’s latest round of stress tests. Besides this year’s addition of the “sensitivity analyses” that take into account the economic shock caused by the pandemic, the Fed in March finalized a stress capital buffer that may result in higher capital requirements for the largest banks.

Right now, it’s a wait-and-see approach for banks and shareholders. Last year, stress-test results for each bank were disclosed during the third week of June, but Federal Reserve Vice Chairman for Supervision Randal Quarles has said the outcomes may come earlier this year.

Christopher Marinac, director of research at Janney Montgomery Scott, said he remains optimistic that sweeping dividend cuts or suspensions won’t come to pass at the nation’s financial institutions. In fact, the firm estimates that 80% or more of the 350-plus public banks it tracks will maintain their cash dividends.

But there are gray areas, such as mortgage deferrals and forbearances, that can’t be truly understood until this fall when another earnings season comes to an end, he said.

“Confidence gets shaken when companies cut their dividends, so the key will be the economy,” Marinac said. “If the economy doesn’t cooperate, then we have to revisit it.”

At two investor conferences this week, executives from JPMorgan Chase, Bank of America, Citizens Financial Group and Regions Financial reaffirmed their plans to keep paying dividends at the current rates.

Some analysts have included JPMorgan, the nation’s largest bank with $3.1 trillion in assets, on a short list of banks whose dividends are most at risk based on the new stress capital buffer rule.

Jamie Dimon, the bank’s chairman and CEO, said JPMorgan will pay less than $3 billion in dividends for the second quarter of this year, “a drop in the bucket” compared to the bank’s total capital base.

Rather than make cuts, he said the better course of action is to “wait and see” how the recovery goes.

“If by any chance it’s pretty clear this is going to get worse dramatically, then of course the board will take up the issue and say, ‘What should we do? When should we do it? How should we do it?” Dimon said. “If a board is mature, they’ll consider that. But you have to have a pretty bad economic environment, I think, for banks to justify [that to] their boards and show that we should cut it now.”

David Turner, the chief financial officer of Birmingham, Ala.-based Regions, said executives of the $133.5 billion-asset bank “feel pretty confident about [their] ability to sustain the dividend even in these stressful times.”

His comments echoed Dimon’s.

“We’ve gone through the stress testing so that we can sustain our dividend and cutting that before it needs to be [cut] is sending a pretty tough message to our investors, and we don’t want to do that,” he said. “But if conditions warrant [it] and the economy continues to decline … there could come a time where that needs to be done.”

Brian Moynihan, chairman and CEO of Bank of America, defended the Charlotte, N.C., bank’s dividends, saying it isn’t depleting capital reserves, while Bruce Van Saun, chairman and CEO of Citizens Financial in Rhode Island, said he thinks the dividend at the current level is secure.

Some argue the Fed should make the decision for banks by mandating reductions or suspensions.

Jeremy Kress is a former attorney in the Fed’s banking regulation and policy group who is now an assistant professor of business law at the University of Michigan Stephen M. Ross School of Business.

He said banks have “very strong incentives” to appear safe and sound by continuing to pay dividends. And no bank, he said, wants to be the first to slash the dividend.

“Lots of banks now are saying, ‘We’re strong enough to pay,’ even if they’re getting closer to the line of financial distress,” Kress said. “If the Fed were to force banks to suspend those payments, it solves a collective action problem. If the Fed does it for the entire industry, then nobody appears weak.”

To date, the Fed has shown little indication that it will force banks to suspend dividend payments. In April, Fed Chair Jerome Powell said he saw no reason for banks to halt dividends, adding that banks are well capitalized and most have already suspended share buybacks.

In a May 24 opinion piece in The Financial Times, Bank Policy Institute President and CEO Greg Baer said a unilateral ban on bank dividends in the U.S. “could strain banks’ ability to support lending and economic growth, both now and over the long term.” Baer said that banks so far have been able to meet customers’ demand for capital and liquidity and still have additional capacity to lend.

Kleinhanzl said he hopes for more clarity from the Fed around the sensitivity analyses.

Until then, it’s hard to predict the future of dividends.

“We’re kind of flying blind here,” he said.

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Stock dividends Stress tests Coronavirus Capital GSIBs Regional banks Federal Reserve Jerome Powell
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