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Fed Stress Test Points To Bank Dividend Cuts

Published Mon, 29 Jun 2020 11:07:34 -0400 on Seeking Alpha

Seeking AlphaDividend Ideas | Financials Fed Stress Test Points To Bank Dividend CutsJun. 29, 2020 11:07 AM ET|| Includes: BK, COF, DFS, GS, MS, PNC, STTby: Tanya AzarchsTanya Azarchs Long onlySummaryThe Fed on Thursday indicated that bank dividend payments should not exceed trailing 12-month earnings.
The Fed stress test estimated banks would experience $179 billion of pretax losses over the next 9 quarters under the severely adverse scenario. This result would be inconsistent with an ability to pay dividends.
The “severely adverse scenario,” designed pre-COVID-19, is less severe than current reality. The Fed is refining the results of three other scenarios that would exacerbate probabilities of dividend cuts.
Credit card banks, COF and DFS, are likely to fare the worst. Trust banks, BK and STT, fare better. Banks with trading emphasis, GS and MS, may fare better than the stress tests show.
The Federal Reserve Bank on Thursday released information on the results of bank stress tests and, at the same time, stated its capital policies in response to the current pandemic impacted economy. Both point to the likelihood of cuts in bank dividends later this year.
The stress test results demonstrate cumulative losses for the top 33 banks could be $179 billion over the 9 quarters, starting in 1Q 2020 under the Fed's "severely adverse scenario", but that would leave the banks adequately capitalized on five key regulatory ratios. While that news is comforting on some level, for dividend investors, it should be very disturbing, because the Fed also said that its general policy would be that banks could not pay out more than they earned in the last 12 months. Much will depend on the timing of those losses. While the second and third quarter dividends may be covered, at some point, they will not be.
Furthermore, the Fed has recognized that the "severely adverse scenario", designed pre-COVID-19, is not as severe as current economic conditions. It has devised three... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
PNC FINANCIAL SERVICES GROUP 137.17   12.4 11.06 4.60 3.34
MORGAN STANLEY 44.32   9.7 4.59 1.40 3.21
STATE STREET 60.27   10.9 5.51 1.88 3.20
BANK OF NEW YORK MELLON 46.31   12.0 3.85 1.24 2.71
GOLDMAN SACHS 218.74   9.2 23.84 5.00 2.32
DISCOVER FINANCIAL SERVICES 84.50   9.9 8.55 1.76 2.09
CAPITAL ONE FINANCIAL 92.91   8.0 11.57 1.60 1.74


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