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Deep Dive: Wells Fargo leads list of bank stocks at risk for dividend cuts

Analysts at Keefe, Bruyette & Woods say U.S. banks’ dividends are ‘broadly safe,’ but pointed out 21 ‘potential dividend-cut candidates.’ Read More...

A recession is a time for dividend cuts, and even though most U.S. banks are in much better shape than they were at the start of the 2008 financial crisis, investors are showing no confidence in the industry.

Here’s a chart comparing total returns (with dividends reinvested) of the KBW Bank Index BKX, +3.69% to the S&P 500 Index SPX, +0.72% this year through May 13:

FactSet

Investors are looking ahead to a difficult credit cycle. The Dodd-Frank legislation in 2010 raised banks’ capital requirements and strengthened regulatory oversight. There is no talk of bank bailouts this time around.

Then again, Federal Reserve Chairman Jerome Powell said Wednesday that a survey by the central bank found that 40% of people in households earning less than $40,000 a year that were counted on payrolls in February had lost their jobs in March.

That points not only to loan forbearances and credit losses, but also to continued pain for countless businesses of all sizes that owe money to the banks.

So it is not surprising that some banks have already reduced their dividends to shore up cash.

Analysts at Keefe, Bruyette & Woods, led by Christopher McGratty, on Wednesday listed 21 banks they say are “potential dividend cut candidates,” even though they think dividends are “‘broadly safe’ for 90% of the banks, a sharp contrast relative to the financial crisis” of 2008.

The largest potential candidate listed for a dividend cut is Wells Fargo & Co. WFC, +7.22%, the only “universal bank” on the list. Wells Fargo’s quarterly dividend is 51 cents a share, for a yield of 9.10%, based on the stock’s closing price of $22.42 on May 13. That high yield reflects investors’ worry over a possible dividend cut. In comparison, the S&P 500’s weighted dividend yield is 2.04%, according to FactSet. The yield on 30-year U.S. Treasury bonds TMUBMUSD30Y, 1.304% is 1.29%.

Here’s KBW’s entire list of 21 banks that are potential candidates for dividend cuts, sorted by total assets:

Bank Ticker Headquarters Total assets ($ billions) – March 31, 2020 Dividend yield – current Dividend payout ratio – trailing Dividend payout ratio – KBW’s estimate for 2020 Total return – 2020 through May 13
Wells Fargo & Co. WFC, +7.22% San Francisco $1,981.3 9.05% 72% 222% -57%
Citizens Financial Group Inc. CFG, +3.95% Providence, R.I. $176.7 7.76% 53% 89% -51%
KeyCorp KEY, +1.81% Cleveland $156.2 7.66% 54% 79% -52%
Huntington Bancshares Inc. HBAN, +3.85% Columbus, Ohio $113.9 8.12% 61% 88% -50%
Comerica Inc. CMA, +7.18% Dallas $76.3 9.31% 51% 89% -58%
CIT Group Inc. CIT, +7.76% New York $58.9 10.50% N/A N/A -70%
Synovus Financial Corp. SNV, +4.93% Columbus, Ga. $50.6 8.47% 45% 147% -59%
Umpqua Holdings Corp. UMPQ, +1.90% Portland, Ore. $27.5 8.91% N/A 263% -46%
First Hawaiian Inc. FHB, +0.70% Honolulu $20.8 7.33% 54% 124% -50%
Hope Bancorp Inc. HOPE, +0.44% Los Angeles $16.0 6.92% 46% 80% -44%
First Financial Bancorp. FFBC, -0.21% Cincinnati $15.1 7.83% 50% 84% -53%
Berkshire Hills Bancorp Inc. BHLB, -1.70% Boston $13.2 9.63% 91% 204% -69%
Northwest Bancshares Inc. NWBI, -0.87% Warren, Pa. $10.7 8.32% 87% 123% -43%
Provident Financial Services Inc. PFS, -1.49% Jersey City, N.J. $10.1 7.92% 62% 81% -52%
Boston Private Financial Holdings Inc. BPFH, -2.14% Boston $8.7 7.63% 66% 155% -46%
Flushing Financial Corp. FFIC, -3.90% New York $7.2 8.42% 74% 147% -53%
Midland States Bancorp Inc. MSBI, +0.73% Effingham, Ill. $6.2 7.89% 61% 87% -53%
Washington Trust Bancorp Inc. WASH, -0.96% Westerly, R.I. $5.6 7.18% 56% 88% -46%
Financial Institutions Inc. FISI, -1.11% Warsaw, N.Y. $4.5 7.27% 45% 78% -55%
Heritage Commerce Corp. HTBK, -1.02% San Jose, Calif. $4.1 7.60% 81% 124% -45%
BCB Bancorp Inc. BCBP, +0.11% Bayonne, N.J. $2.9 6.41% 56% 93% -35%
Sources: KBW, FactSet

Scroll the table to see all of the data.

The trailing dividend payout ratio was calculated by dividing the current annual dividend rate per share by earnings per share for the past four quarters. A payout ratio of “N/A” means the current annual dividend rate exceeds the past four quarters’ EPS, or in the case of the forward KBW estimates, that the current annual dividend rate will exceed 2020 EPS.

To be sure, the KBW analysts wrote that their analysis “suggests that the risk of a potential cut is more priced in” for Wells Fargo, along with CIT Group Inc. CIT, +7.76%, Comerica Inc. CMA, +7.18%, Berkshire Hills Bancorp BHLB, -1.70% and Synovus Financial Corp. SNV, +4.93%.

The analysts wrote that “Wells Fargo’s issues appear self-isolated,” as the bank continues to operate under strict regulatory supervision in the wake of several customer-service scandals. KBW analyst Brian Kleinhanzl wrote in a separate report May 13 that “WFC’s high payout ratio is the primary driver of investor fear that a dividend cut could happen,” and cited an estimated dividend payout of 221% for 2020, compared with KBW’s estimates of a median payout ratio of 59% for universal banks covered by the firm.

KBW also listed six small to mid-sized banks that have reduced their dividends recently:

Cadence Bancorp CADE, +4.22%, Great Western Bancorp GWB, -0.25%, Hanmi Finanial Corp. HAFC, -0.32%, PacWest Bancorp PACW, +0.12%, RBB Bancorp RBB, -1.42% and 1st Source Corp. SRCE, -1.26%.

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