Wells Fargo to cut dividend; other big banks boost capital buffer
A number of big banking companies said they’ll be keeping third-quarter dividends steady, with one exception: Wells Fargo.
Wells said it would be lowering its dividend from the 51 cents per share it paid in the second quarter, and that it plans to announce the exact figure when it reports second-quarter earnings on July 14.
Meanwhile, seven banking companies — Goldman Sachs, Morgan Stanley, Capital One Financial, Ally Financial, Discover Financial Services, Citizens Financial Group and JPMorgan Chase — said they would set aside a stress capital buffer greater than the minimum of 2.5%.
The announcements from a dozen companies, which came out gradually after the markets closed on Monday, were hotly anticipated after the Federal Reserve released stress test results last week that were complicated this year because of efforts to account for the devastating toll of the coronavirus pandemic.
Moreover last week, the Fed said it would require big banks to suspend share repurchases during the third quarter, and limit third-quarter dividend distributions to the lower of either their second-quarter payout (dividends as a percentage of earnings) or their average payout from the four prior quarters.
Dividends paid by Wells Fargo and Capital One had appeared to be higher than what the Fed would allow, based on net income over the past four quarters and how much extra capital they would be required to hold in order to weather an economic downturn.
Capital One did not indicate on Monday whether its dividend would be cut as well.
Meanwhile, Wells Fargo said that its allowance for credit losses in the second quarter is expected to increase by a substantially larger amount than the increase in the first quarter.
“There remains great uncertainty in the path of the economic recovery,” Wells CEO Charlie Scharf said in a press release, “and though it’s difficult to accurately predict the ultimate impact on our credit portfolio, our economic assumptions have changed significantly since last quarter.”
The Fed was said to have told banks to wait until Monday to report their capital plans for the third quarter and what capital buffer they would have to maintain as a result of the stress tests. Banks will be resubmitting longer-term capital plans in the coming months.
The stress capital buffer is the difference between the bank’s capital level as the “severely adverse” scenario under the stress tests began and where it was projected to end up, taking into consideration what the banks planned to pay out in dividends.
The lower the stress capital buffer, the better the bank is seen to have performed under the stress test, with the minimum being an 2.5% required to be held starting in October through September 2021.
The Fed will finalize what buffers are required by Aug. 31.
Citigroup, Bank of America, Wells Fargo and State Street reported 2.5% stress capital buffers.
On the other end of the spectrum was Goldman Sachs. The Wall Street giant reported a 6.7% stress capital buffer requirement, meaning its businesses were considered riskier than other banks and would have to hold a larger cushion.
Even though Goldman is required to hold a higher stress capital buffer, the amount the company plans to pay shareholders in the third quarter isn’t expected to take a dent.
CEO David Solomon said in a press release that Goldman will maintain its dividend, which was $1.25 per common share in the second quarter.
“We fully intend to continue this dynamic capital management while helping our clients continue to navigate challenging markets,” he said.
Among the other banks reporting a need for higher stress capital buffers were Morgan Stanley at 5.9% and Capital One at 5.6%.
Morgan Stanley intends to continue paying its dividend of 35 cents per share, and CEO James Gorman said in a statement Monday that the company will “reevaluate our capital actions when we have more confidence in the shape and path of the economic recovery.”
Discover said that its stress capital buffer has been set preliminarily at 3.5%, and that it plans to continue its dividend of 44 cents per common share in the third quarter.
A separate analysis the Fed released last week showed the largest 33 banks operating in the U.S. had enough capital to weather the pandemic. But the central bank was limiting how much of that capital could be used to pay shareholders through at least September, though some critics have said banks should be forced to retain as much capital as possible.
Stock buybacks were banned altogether as a way to force banks to preserve some cushion in case the downturn turns more severe.
JPMorgan, the nation’s largest bank, with assets of $3.1 trillion, said the latest round of stress tests shows a stress capital buffer requirement of 3.3%.
JPMorgan’s board of directors said in a statement Monday that it “currently intends to maintain” the quarterly common stock dividend of 90 cents per share for the third quarter. That will be subject to approval by the board in September.
“At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positions,” Chairman and CEO Jamie Dimon said in the release. “If there is a significant deterioration in the future outlook, the firm will, of course, consider reducing dividends.”
Besides halting its stock repurchase program back in March, the bank will now also suspend its net share repurchases at least through the third quarter at the direction of the Fed, Dimon said.
He said the bank already planned to do that.
“Our highest and best use of capital continues to be supporting our clients as they weather the current crisis,” Dimon said. “We will continue to maintain a fortress balance sheet that allows us to do our most important job, which is to support all of our stakeholders — small and large — in good times and, most importantly, during periods of extreme stress.”
Citi CEO Michael Corbat said the company would be able to maintain its dividend of 51 cents per share in the third quarter and over the four quarters covered by the 2020 comprehensive capital analysis and review cycle.
“These results are consistent with our expectations, and indicate that we have the capacity to withstand extreme stress,” he said. “While we will continue to evaluate our planned capital actions relative to the most recent financial and macroeconomic conditions, we believe we are well positioned to continue to support our customers and the broader economy, while also continuing with our planned capital actions.
Bank of America said Monday it “intends” to hold its dividend payments of 18 cents per common share “until further notice.”
Ally Financial said that its stress capital buffer has been set by the Fed at 3.5%, and that it plans to maintain its current dividend in the third quarter.
Citizens Financial Group in Providence, R.I., said its stress capital buffer requirement would be 3.4%. The company said it would maintain its quarterly dividend of 39 cents per common share under the capital plan.
“These results highlight our capacity to maintain our dividend through the real-life stress the country is experiencing this year,” Chairman and CEO Bruce Van Saun said in a press release. “We continue to demonstrate our resiliency, with a strong capital base that we are putting to use in support of our clients and communities.”
Citizens said it would “follow a reconsideration process” for how the Fed would calculate its stress capital buffer because the agency was using past data “from earlier periods when Citizens was owned by a foreign bank.”
The company at the time was not allowed to access Troubled Asset Relief Program funds. The Fed is phasing in a model that would more heavily weigh recent revenue data, but Citizens said the results in the meantime remain inaccurate.