Wells Fargo expects dividend cut as coronavirus roils financial system

©The Charlotte Observer

Mel Melcon/Los Angeles Times/TNS

Wells Fargo expects it will shrink its dividend when it announces second-quarter earnings in July, the San Francisco-based bank said Monday.

It will be the bank’s first dividend cut since the financial crisis.

The move came after the Federal Reserve released the results of its annual stress tests of the country’s largest banks Thursday, in which it barred them from buying back their own stock or increasing dividend payouts to shareholders in the third quarter.

Despite the restrictions, the regulator said that banks were generally still well-capitalized during the economic downturn caused by the coronavirus.

Among the restrictions the Fed announced Thursday was that third quarter dividends couldn’t exceed the average of the firm’s net income for the last four quarters. For the big banks, the limitation was only expected to immediately affect Wells Fargo, according to analysts.

In the Monday announcement, the bank did not specify by how much it would cut its dividend, which currently stands at 51 cents per share. Also on Monday, Charlotte-based Bank of America said it would keep its dividend flat at 18 cents per share.

“These are certainly extremely challenging times for many and we remain committed to supporting our customers and communities,” Wells Fargo CEO Charlie Scharf said. “We will continue to take appropriate measures to maintain strong capital and liquidity levels and to improve the earnings capacity of the company.”

Even before the coronavirus, Wells Fargo struggled to keep up with its large bank peers, restricted by a cap on the bank’s size imposed as a result of its fake-accounts scandal. Tasked with redeeming the bank when he took over in October, Scharf had just started to reshape the bank when the pandemic hit.

Wells reports second quarter earnings July 14. Scharf said Monday that investors should expect a “substantially higher” amount of money set aside to cushion the impact of coming bankruptcies than it reserved in the first quarter. The bank set aside $3.1 billion in the first quarter.

Wells Fargo employs 27,000 people in Charlotte, a legacy of the bank’s 2008 purchase of Wachovia.

The Monday announcement makes Wells Fargo the first major bank to forecast a dividend cut since the coronavirus immobilized the American economy this year. Some financial regulation advocates have called for bank dividends to be halted altogether while the impact of the virus on the financial system is still in flux.

Fed Governor Lael Brainard, the lone Democrat in the central bank’s senior leadership, called for a halt to shareholder payouts Thursday, to allow banks to preserve capital during uncertain economic times.

For years, banks have generally held on to just enough capital to comply with regulators’ requirements, often giving any surplus to shareholders.

That has sparked fears that if enough consumers or businesses default on their loans as a result of the pandemic, banks won’t have enough capital.

“This is a time for large banks to preserve capital, so they can be a source of strength in a robust recovery,” she wrote.

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©2020 The Charlotte Observer (Charlotte, N.C.)