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Wall Street holds dividends steady after stress tests — except for Wells Fargo


Wells Fargo said it expects to cut its dividend for the first time in more than a decade to preserve capital to weather the coronavirus pandemic.

The fourth-largest US bank by assets said Monday it would cut its dividend from the 51 cents it paid in each of the four most-recent quarters. The bank said it would announce its payout when it reports second-quarter earnings on 14 July.

The other big US banks — JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley — said they intend to hold their dividends steady. Still, this would be the first time any of the major banks reduced its per-share payout since the second quarter of 2009, when they faced an existential threat from the housing crisis.

Banks are in a much stronger position now than they were during the past financial crisis. But with the outlook highly uncertain because of the pandemic-induced economic collapse, the Federal Reserve asked banks last week not to increase their dividends. The central bank said that in a worst-case scenario in which the economy takes a long time to recover, banks could face as much as $700bn in loan losses.

The Fed also said last week that lenders couldn’t pay a dividend in excess of average quarterly earnings between the third period of last year and the second period of this year. As a result, some investors and analysts believed that Wells Fargo, whose earnings declined sharply to start the year, would have to cut its dividend.

Wells Fargo executives hadn’t committed to keeping the dividend intact, instead saying they would have to evaluate the Fed’s guidance and the bank’s own earnings power. The bank earned $653m in the first quarter, down 89% from a year earlier. Chief executive Charles Scharf has said earnings are expected to be similarly weak in the second quarter. In a statement on 29 June, he said he expects the bank will need to make a bigger increase in its allowance for credit losses than in the first quarter.

“There remains great uncertainty in the path of the economic recovery and though it’s difficult to accurately predict the ultimate impact on our credit portfolio, our economic assumptions have changed significantly since last quarter,” Scharf said.

The biggest banks all posted lower profits in the first quarter, and they socked away billions of dollars to deal with soured loans. But Wells Fargo’s business lines were already struggling pre-pandemic; the bank’s fake-account scandal of four years ago has crimped revenue growth and forced it to lean on cost cutting.

The potential for a dividend cut has been a concern among Wells Fargo investors in recent months. The bank’s share price has more than halved in 2020, putting in the worst performance of the six largest banks. The KBW Nasdaq Bank Index was down 36% for the year and the S&P 500 was down 5.5%.

The Federal Reserve also asked banks not to repurchase their own shares in the third quarter. Banks had previously committed to halting buybacks through the second quarter.

— Liz Hoffman contributed to this article, which was published by the Wall Street Journal

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