Bad optics: US banks face calls to slash payouts to shareholders

US lawmakers say it is inappropriate for banks to tap emergency funds to pay dividends to shareholders.

    United States Senate Majority Leader Mitch McConnell walks back to his office on Tuesday after a motion failed in the attempt to wrap up work on coronavirus aid legislation in Washington, DC, where lawmakers continue debating an a $2 trillion economic stimulus package [Mary F Calvert/Reuters]
    United States Senate Majority Leader Mitch McConnell walks back to his office on Tuesday after a motion failed in the attempt to wrap up work on coronavirus aid legislation in Washington, DC, where lawmakers continue debating an a $2 trillion economic stimulus package [Mary F Calvert/Reuters]

    Big United States banks may cut dividends for political rather than financial reasons as a growing chorus of lawmakers, former regulators and consumer advocates say it is inappropriate for them to tap emergency funding programmes while paying out cash to shareholders.

    The eight biggest US lenders, led by JPMorgan Chase & Co, already halted stock repurchases earlier this month. They characterised it as a patriotic move that would allow them to put more capital toward lending to individuals and businesses during the coronavirus outbreak, which has clobbered stock prices and led the US Federal Reserve to pour trillions of dollars into the financial system.

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    But none of the banks have cut dividends, with JPMorgan saying it had no plans to do so.

    "That is not enough," said Sheila Bair, former chair of the Federal Deposit Insurance Corp, in an interview on Tuesday. "They should be conserving all available capital. We are in a severe health crisis that is turning into an economic crisis."

    Those eight banks collectively pay about $9bn in quarterly dividends on common stock, according to Refinitiv data.

    Big banks faced similar criticism last week from Democratic lawmakers and groups including the Systemic Risk Council, a global group of influential ex-regulators that counts Bair as a member, and Better Markets, which advocates for Wall Street reforms.

    US Congressional Representative Maxine Waters, who chairs the House Committee on Financial Services, proposed a temporary ban on corporate stock buy-backs and dividends.

    Cutting dividends at this point would not be a sign that the banks are in financial straits, but rather that they are sensitive to political concerns, analysts said.

    Although banks' balance sheets are in much better shape than those of other companies whose dividends are at risk - such as airlines, hotels, automakers and retailers - the industry still faces a stigma from the last US economic crisis in 2008.

    The big-bank bailouts of that era led to the Occupy Wall Street movement and advocacy work that continues today. On Monday, the hashtag #NotDying4WallStreet sprouted up on Twitter, in response to politicians - including Republican US President Donald Trump - who have said major cities that have shut down due to coronavirus risks should reopen to help the economy.

    The dividend pressure has ramped up even more in Europe, where industrial companies have begun cutting payments and Banco Santander SA said it would not issue its next semiannual dividend despite being able to do so.

    Optics matter

    Even though US banks are also flush enough to keep paying dividends at current levels, they may decide to cut them for appearance's sake, some analysts said.

    "They might trim the dividends back for optics," said Viola Risk Advisors analyst David Hendler. "But in terms of capital, the US banks are the strongest banks in the world."

    Slashing dividends is a difficult decision for companies because the payouts are seen as evidence of good financial health and encourage loyalty from investors who buy shares or indexes expecting that income.

    "Most companies will view their dividends as sacrosanct," said Portales Partners analyst Charles Peabody, who expects most big banks to maintain theirs.

    But Bair noted that, in addition to Fed programs that have poured trillions of dollars into bond markets in recent weeks, banks have also benefited from expanded deposit insurance and regulatory easing and that their shareholders have gotten generous payouts the past few years.

    "Now is not the time to be releasing precious capital," she said.

    Banks that joined JPMorgan in suspending share buybacks through June were Bank of America Corp, Citigroup Inc , Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Bank of New York Mellon Corp, and State Street Corp.

    The decision will save them about $40bn of capital, which could support about $400bn of loans, analysts said. Bank dividends usually use about one-third as much capital as buybacks.

    Financial companies supplied nearly 15 percent of dividend payments from the S&P 500 stock index last year, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

    "Dividends are typically the last thing to go, but we have a liquidity issue now," Silverblatt said. "It is an option they will have to evaluate."

    SOURCE: Reuters news agency