• GB Davis

Select Banks likely to Begin Cutting Dividends on June 29, after Fed Suspends Sharebacks (6/28/20)

On June 8, 2020, in "U.S. Bank Dividends Vulnerable Given Added Challenges of Stress Tests (Stress Capital Buffer, CECL Phase-In Amid Coronavirus Fallout Are New Considerations)" Fitch indicated, in part:

  • This year’s annual Dodd-Frank Act Stress tests (DFAST) and regulatory capital planning process for the large U.S. banks incorporate several new features, such as the inclusion of the stress capital buffer, an overlay incorporating the impact of the coronavirus pandemic and the Current Economic Credit Loss (CECL) impact phase-in. 

  • Fitch has no insight into banks’ contemplated capital plans as the annual stress testing is a confidential regulatory progress. However, we expect capital distribution requests will be conservative relative to prior years as a result of the uniqueness of this year’s tests. Capital plans will also depend on the depth and duration of the current recession and potential regulatory, political or reputational risks in increasing capital distributions. A key element of the overhauled stress test is the replacement of the “pass-fail” nature of the CCAR process with the new stress capital buffer (SCB), a bank-specific capital add-on that combines how a bank performs under the regulatory stress tests with any globally systemic capital surcharge. The SCB serves as a day-to-day minimum for capital levels  

On Friday, June 26, 2020, immediately following the U.S. Market close, in "Fed Wait-and-See Approach Leaves Some U.S. Bank Divs Vulnerable," Fitch indicated, in part:

  • The results of the Federal Reserve’s 2020 stress test results indicate that large banks are sufficiently capitalized amid stress scenarios. However, the newly introduced stress capital buffer (SCB), as well as the novel approach of limiting dividends based on recent earnings, will likely force some U.S. banks to reduce dividends in the near term, which would be prudent given the still significant economic uncertainty, says Fitch Ratings. Moreover, the requirement for the banks subject to stress testing to re-submit their capital plans "later this year" appears to be a placeholder on the Federal Reserve’s part, allowing for further assessment of bank capital resiliency as time progresses and the duration of the pandemic and policy response is evaluated.

  • The largest U.S. banks will announce their respective capital distribution plans on Monday, June 29. Notably, the Fed has mandated the suspension of bank share repurchases for 3Q20, which Fitch had expected banks to implement given the uncertainty of the economic environment. However, the Fed’s new approach to capping dividends in 3Q20 to levels no higher than trailing four-quarter average of net income was unexpected and viewed as potentially a "catch-all" for those banks that still fared relatively well under DFAST with limited capital erosion despite recent weak earnings. In fact, Fitch estimates that, under the SCB requirement, most banks would still be able to implement board-approved dividends at their current levels without prior Fed approval, which we believe would have been negative for creditors.  

  • Fitch expects a number of banks to announce dividend reductions on June 29 due to this novel approach.

We would not be surprised, initially, on June 29 to see heavy Credit Card issuers  $COF, $AMEX cut their dividends on June 29.  We would not be surprised to see Regionals: $KEY, $BOH, $CMA, $FHB, $FHN, $HBAN, $UBSI cut their dividend on June 29.  We think it's only a matter of time before $WFC is forced to cut its dividend and resubmit a capital plan in 2H20.

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