Questions are building about whether big U.S. banks will have to cut dividends later this year as the coronavirus crisis puts a record portion of Americans out of work, making it difficult for borrowers to pay back loans.
Wall Street analysts were initially skeptical that U.S. lenders would have to follow European counterparts and non-financial companies that have already done so, but in recent days, some have started to take the possibility more seriously.
Banks that have heavy exposure to credit cards are most at risk, they said.
Those lenders, including Citigroup Inc., JPMorgan Chase & Co. and Capital One Financial Corp., may breach Federal Reserve limits on using capital for dividends when loan losses escalate and erode profits.
“One of the most important variables that will determine whether banks have adequate capital to maintain dividends is the extent to which consumers draw down on outstanding credit-card lines,” Goldman Sachs bank analyst Richard Ramsden said in a report on Thursday.
Credit cards have an “outsized impact,” Mr. Ramsden said, because lenders have extended some US$2-trillion in those loans to consumers, and performance is so closely tied to unemployment.
Card loan loss rates may double under severe economic stress and be more than three times the rate on commercial loans, he said.
On balance, however, “all of the banks should be in a position to maintain dividends at, or close to, the current run rate,” he said.
Dividends are seen as evidence of good financial health and encourage loyalty from investors who expect that income, which makes companies leery of cutting them.
However, nearly 10 million Americans have filed jobless claims as the coronavirus has shut down retail stores, restaurants and other businesses deemed “non-essential” across the country.
Economists expect the unemployment rate may eventually spike as high as 20 per cent and U.S. economic output fall as much as 34 per cent before the country can get back to normal.
The European Central Bank told their lenders on March 27 to skip dividends and share buybacks until at least October, estimating they could save €30-billion (US$32.4-billion) by doing so.
Although major U.S. banks already halted share repurchases through June to conserve capital, they face political pressure from Democratic lawmakers, prominent former regulators and some economic commentators to cut dividends as well.
Banks have so far resisted those calls, arguing that they are financially stronger than European banks.
“Our dividend is sound,” Citigroup chief executive Mike Corbat told CNBC on Wednesday. “We plan on continuing to pay it.”
Goldman Sachs Group Inc. CEO David Solomon and Morgan Stanley CEO James Gorman made similar statements in television interviews last week.
Behind the scenes, however, dividends have increasingly become a top agenda item, an industry lobbyist told Reuters, with bankers discussing what they should do and whether they should coordinate any action.
A main concern is that suspending dividends will hurt share prices at a time when stocks are already under intense stress, the person said, asking not to be named because he is not authorized to speak to the media.
The industry may have no choice if banks get too close to the Fed’s limits on capital use for dividends, analysts said. That could happen as soon as the second half of this year, particularly for major card lenders, as delinquencies and loan-loss provisions increase, Mr. Ramsden said.
If unemployment reaches 10 per cent, banks might report less in quarterly profits than they planned to pay out in dividends, Oppenheimer & Co. analyst Chris Kotowski said.
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