Bank Dividends In Danger After Fed Intervenes To Preserve Capital Amid COVID

There's more uncertainty in store for investors in the some of the US's largest banks, after the Fed’s move to restrict their dividend payout and share buyback plans.

The Federal Reserve told 33 of the largest US and global financial institutions on Friday they’re not allowed to hike their dividends or resume buybacks through at least September, amid the global coronavirus pandemic which has pushed the US economy into a deep recession and increased risks for lenders.

The decision came after the central bank’s annual stress test which examines banks’ ability to survive in a downturn. Through these tests, the Fed can force a change in an institution's capital-return plans, such as dividends and share buybacks, to avoid a situation like the one these lenders found themselves in after the 2008 Financial Crisis.

The Fed’s recent test includes a new formula for dividends that dictates that a lender’s payout cannot exceed its average net income from the previous four quarters.

The Fed “is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months,” Fed Vice Chairman for Supervision, Randal Quarles, said in the statement.

“The banking system remains well capitalized under even the harshest of these downside scenarios.”

During the months-long coronavirus lockdown, the biggest US banks didn’t change their payout policies. For the first three months of 2020, the four biggest U.S. commercial banks—Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC)—all paid them, with JPMorgan and Wells Fargo paying out more than their net incomes.

Uncertainty about the dividend plans from these lenders means investors have little incentive to own shares of these companies, especially when their earnings are coming under pressure during the ongoing recession.

A PERIOD OF UNDERPERFORMANCE
The KBW Bank Index plunged 6.4% on Friday after the news, to the lowest in a month.

KBW Bank Index Weekly 2017-2020

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