America’s biggest banks will defend their plans to continue paying dividends in submissions to regulators on Monday, just days after Europe’s regulators urged lenders to abandon shareholder payouts while they dealt with the coronavirus pandemic.
US banks’ annual capital plans, due to be submitted to the Federal Reserve on Monday, are expected to include proposals to continue paying dividends, reinforcing comments from prominent bank chief executives in recent days, according to people familiar with the situation.
The bankers, including Goldman Sachs boss David Solomon, Morgan Stanley boss James Gorman and Citigroup chief Mike Corbat, argued that they had the means to continue paying dividends and that cutting them would be “destabilising to investors”.
“We’re in a very different position than what we see in Europe,” said Marty Mosby, a veteran banks analyst at Vining Sparks.
“How we set it up [post-crisis capital requirements] was to be able to not have those dividends collapse [in a crisis]. That’s what creates a financial crisis: when dividends start to be ratcheted lower that shakes confidence.”
The top 20 US banks have more than $200bn in excess capital and make more than $50bn in profits before loan losses every year, according to analysts at Barclays, giving them ample room to cover dividend payouts even if loan losses across the group were as high as the $175bn they recorded in 2009.
Mr Solomon told CNBC last week that US banks were in a different position to those in Europe. “Here in the United States, it [the dividend] is a much smaller part of capital return. We have as an industry stopped a large portion of the capital return [and] it’s my expectation we’ll pay our dividend return,” he added.
Research from Autonomous shows that about two-thirds of US banks’ payouts are in the form of share buybacks, which the biggest eight banks voluntarily suspended until at least July. In Europe, share buybacks account for about 10 per cent of capital return, so “in order for European banks to ‘pitch in’ and reduce their payouts, it really has to be the dividends that get cut”, Autonomous said.
Mr Gorman told CNBC that suspending dividends would be a “very poor thing to do” since it would deprive investors of income and be “destabilising”. In a separate interview, Mr Corbat told CNBC that Citi’s dividend was “sound and we intend to keep paying it”.
Jason Goldberg, analyst at Barclays, said that whether the banks ultimately make those payouts would depend on the broader environment in June, when regulators have completed stress tests on the resources banks need to conserve to deal with future crises.
“At that point, if we are on the other side of this and the economy is starting to come back, they are likely fine,” Mr Goldberg said. Former Fed chair Janet Yellen was quoted in a Wall Street Journal article arguing the case for restricting dividends on the basis that “if things work out well, banks can distribute income later on . . . If not they’ll have a buffer.”
The six biggest US banks got approval to pay about $35bn of dividends and buy back about $110bn of shares from July 2019 to July 2020.