Bank Dividend Cuts Likely - Here's Why And What Could Happen Next

There are five reasons bank dividend cuts appear imminent for large banks.
The implications of these five reasons are far-reaching.
Restoration of bank dividends will depend on a economic rebound.
Smaller, well-capitalized banks with sterling loan portfolios should be able to preserve dividends.
Purpose
The purpose of this post is to analyze data and factors that influence the banking industry's ability and willingness to pay cash dividends. There are five reasons bank dividend cuts appear imminent. The implications of bank dividend cuts are far-reaching and touch on not only the health of individual banks, but the safety and soundness of the banking system. Moreover, as the banks learned a decade ago during the Great Panic of 2008-2009, bank CEOs and bank regulators need to be much more savvy and aware of the politics of banking. The fact that the Covid-19 Crisis hit in an election year makes bank dividends a political lightning rod.
This analysis begins with an overview of the five reasons dividend cuts appear imminent and closes with a description of how the rationale for dividend cuts could be communicated by leading bank CEOs and bank regulators. This analysis also includes a risk assessment of the politics of bank dividends.
Reason 1: 26 Million Jobless, Rapid Decline in GDP
In my 2016 book, Investing in Banks, I introduced bank investors to the “Law of GDP.” Quite simply, bank profitability is highly correlated to GDP. As rain is to farmers, GDP is to bankers.
We know GDP is in the tank, but we not yet know in April 2020 how badly. US Jobless Claims over the past five weeks exceed 26 million as Figure 1 shows. This massive number is not only heartbreaking, but portends serious trouble ahead for 2nd quarter (and beyond) GDP.
Figure 1

The magnitude of the distress facing US consumers and businesses is reflected in the extraordinary comments made by bank executives during earnings calls last week. Here are just three... Read more