Wells Fargo & Co. confirmed Monday plans to reduce its quarterly dividend by an unspecified amount in response to the first Dodd-Frank Act stress test of 2020.
Wells Fargo has paid a 51-cent per share quarterly dividend since getting the Fed’s approval of its 2019 capital plan. The bank will disclose its third-quarter dividend as part of its second-quarter earnings report on July 14.
Truist Financial Corp. and PNC Financial Services Group did not immediately disclose their plans. Truist paid a 45-cent quarterly dividend over the past year, while PNC has paid a $1.15 quarterly dividend.
Bank of America Corp. said it would maintain its 18-cent dividend “until further notice.”
The Federal Reserve Board said Thursday it is requiring 33 U.S. financial institutions to update and resubmit their capital distribution plans within 45 days after the board provides updated scenarios.
Banks will be allowed to raise their quarterly dividend if the dividend does not exceed an amount equal to the average of its net income for the four preceding quarters.
“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,” Charlie Scharf, Wells Fargo’s chief executive, said in a statement.
Scharf warned Wells Fargo expects “an increase in the allowance for credit losses substantially higher than the increase in the first quarter.”
On April 14, Wells set aside $3.83 billion in its loan-loss provision for the first quarter to help absorb losses on loans it expects won’t be repaid on time.
By comparison, Wells Fargo had a loan-loss provision of $644 million in the fourth quarter and $845 million a year ago.
Truist set aside $893 million in its first-quarter provision.
Wells Fargo’s first-quarter net income plunged to $42 million, compared with $5.51 billion for the same period a year ago and $2.55 billion in the fourth quarter.
Analysts said Thursday that the Fed’s dividend requirement likely would lead not only Wells Fargo to cut its quarterly dividend, but also Capital One Financial Corp and Discovery Financial Services. Capital One did not cite its dividend plans in a brief stress-test statement.
The Fed prohibited banks from conducting share repurchases in the third quarter, which most already had suspended because of realized and projected revenue reductions for fiscal 2020.
However, banks are allowed by the Fed to make share repurchases “relating to issuances of common stock for employee stock ownership plans.”
Seeking Alpha contributing analyst Tanya Azarchs said PNC may be in better shape to maintain, if not increase its dividend because of its sale in May of 28.75 million common and preferred shares of BlackRock Inc., the world’s largest asset manager. PNC projected $15 billion in net proceeds.
Azarchs said PNC’s “capital and earnings cushion should rise in a way not anticipated in the stress test, so it may have the best chance at maintaining dividends among the regional banks.”
The Dodd-Frank Act stress-test requirements are being tested, if not stretched to the point of breaking, for the first time since their debut in 2013 as local and state economies have been restrained by stay-at-home government orders amid the coronavirus pandemic.
The 33 banks represent more than 80% of domestic banking assets.
The severe downturn time frame measured by the Fed is the first quarter of 2019 to third quarter of 2021.
The pre-pandemic downturn metrics included: an 8.5% decline in real gross domestic products from first quarter 2019 to third quarter 2021; 10% U.S. unemployment rate; 28% decline in home prices; 35% decline in commercial real-estate prices; and a 50% decline in the Dow Jones Industrial Index.
The U.S. jobless rate was 4.4% in March, 14.7% in April and 13.3% in May.
Because the current pandemic had led to a more severe downturn, the Fed conducted an additional three stress-test scenarios: a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.
In those scenarios, the U.S. jobless rate was projected during the measurement period at between 15.6% and 19.5%.
The Fed said that under the U- and W-shaped scenarios, “most firms remain well capitalized, but several would approach minimum capital levels.”
“The sensitivity analysis does not incorporate the potential effects of government stimulus payments and expanded unemployment insurance.”
Wells Fargo projected an overall $23.1 billion revenue loss during the stress-test time period.
It estimated $26.9 billion in net revenue and requiring a loan-loss provision of $39.9 billion. There also would be $8.9 billion in trading and counter-party losses and $1.1 billion in realized losses on securities and other losses.
The projected losses and net charge-offs again would be spread across several categories totaling $27.7 billion in loan losses.
For Truist, it projected an $8 billion loss, factoring $11.9 billion in revenue, a $19.3 billion loan-loss provision and $600 million in other losses.