EDITOR NOTE: Wells Fargo Bank just announced that it was cutting its dividend payments after it had completed a Federal Reserve “stress test.” As you know, companies cut dividends to bolster their own capital resources when the current or forecasted economic environment looks less than promising. Although many other banks are looking to maintain their current dividend payments, the COVID-driven environment is a highly fluid situation. And by the looks of things, the situation doesn’t appear to be getting any better. Big banks will undergo further Fed evaluation later this year. It’s also later this year when many analysts expect the economy to take a turn for the worse, as the FDIC and Dodd Frank Act spike reserve requirements this September 2020!
Wells Fargo shares fell in late trading Monday after confirming that it will have to cut its third-quarter dividend.
The announcement comes three days after the Federal Reserve released the results of its annual stress test. While the regulator said that the banking sector was well-capitalized and equipped to handle “the harshest shocks,” it nevertheless put restrictions on the level of capital banks can return to shareholders. Share repurchases are halted, dividends are capped at second-quarter payouts, and further dividends are limited to an average of recent earnings.
With the new structure in place, almost all of the 34 banks the Fed reviewed appeared able to maintain their current dividend. But many noted that Wells Fargo’s (ticker: WFC) dividend appeared most at risk, based off its earnings profile. The stock has sold off more aggressively than peers amid the coronavirus-spurred economic downturn.
On Monday, Wall Street got the confirmation it was expecting. After the market close, Wells Fargo said that it expected its third-quarter dividend to be cut from its current level of 51 cents a share, prompting its shares to dip 1.2%, to $25.39 in pre-open trading.
“These are certainly extremely challenging times for many and we remain committed to supporting our customers and communities, and we will continue to take appropriate measures to maintain strong capital and liquidity levels and to improve the earnings capacity of the company,” Wells Fargo chief executive Charlie Scharf said in a statement, adding that he expects the bank to report “substantially higher” credit loss reserves in the second quarter compared with the first.
Wells Fargo wasn’t the only big bank providing an update following the Fed’s stress test results. That said, the other big banks, including Citigroup (C) and Bank of America (BAC) seemed intent on maintaining their current dividend levels. Citigroup shares climbed 0.6% after hours, while Bank of America shares dipped 0.2%
Morgan Stanley (MS) said it expected to maintain its 35-cent dividend and credited its pending acquisition of E*trade Financial Corporation (ETFC) for diversifying its business and enhancing its capital and liquidity position. Morgan Stanley shares climbed 0.7% after hours.
Goldman Sachs Group (GS), which appeared to brush up against its minimum capital targets in the Fed’s severe scenario, also said it intended to maintain its current dividend level.
“We have a track record of rebuilding capital when necessary, and have brought our standardized CET1 ratio above 13% as this quarter comes to a close,” Goldman Sachs CEO David Solomon said in a statement. Goldman Sachs shares rose 0.3% after hours.
JPMorgan Chase (JPM) also appeared intent on maintaining its quarterly $0.90 dividend and noted that the distributions will be subject to the approval of the board.
“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,” Chief Executive Jamie Dimon said in a statement. “If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.”
The big banks will be under the Fed’s watch quarterly and will also have to resubmit their capital plans later this year.
Originally posted on Barron's