Banks might not be ordered to halt dividends but that doesn’t mean investors can rest easy.
Bank dividends have been under pressure over the past two months as profits have been constrained by low interest rates and increasing loan losses. As banks have been working to conserve capital to serve struggling clients—namely by halting buybacks—there have been calls by regulators to also suspend dividends.
While European regulators were successful in urging banks there to curb their dividends, few observers are certain that U.S. regulators, such as the Federal Reserve, will take similar steps. However, the Fed has other ways of achieving the same objective—namely through its annual Comprehensive Capital Analysis and Review and Dodd-Frank Act Stress Tests, which are set to wrap up in June.
“We think the Federal Reserve is unlikely to mandate by fiat that large banks stop paying dividends,” Saul Martinez, analyst at UBS Securities said in a note Monday. “However, the likelihood has increased that existing supervisory processes, notably DFAST/CCAR, are used to restrict dividends, in our view.”
Earlier this month, Fed Vice Chair Randal Quarles indicated in testimony before the Senate Banking Committee that this year’s test would include a current-events analysis. This is also the first year that the Fed will incorporate into its analysis what it calls its stress capital buffer, which will state the minimum level of capital banks have to have through September of next year.
With potentially higher minimum capital requirements, banks may find that their ability to pay dividends is constrained.
(ticker: C) and
(JPM) facing the highest risk of having to cut or halt their dividends as a result of increases in required capital. But the two should recover quickly when conditions normalize, given their history of higher profit levels.
“[T]he two banks could rebuild capital quickly, especially once loan loss reserve true-ups peak,” Martinez writes.
dividend could also be at risk, though for different reasons, according to Martinez. The San Francisco-based bank has a “sizable capital buffer” but its ability to create additional loss-absorbing capital lags behind peers, he…