Big bank earnings are right around the corner, and Wells Fargo & Co (NYSE: WFC) is expected to report a small loss in the second quarter on Tuesday morning.
On Monday, one Wall Street analyst said a surprising requirement by the Federal Reserve could put Wells Fargo’s dividend at risk.
The Analyst: Bank of America analyst Erika Najarian reiterated her Neutral rating and $29 price target for Wells Fargo.
The Thesis: The Federal Reserve recently implemented a surprising income test for banks to gain approval for their dividend plans. The requirement states that common stock dividends can’t exceed the average GAAP net income for the previous four quarters.
Najarian said Wells Fargo’s dividend “capacity” under the new rule will dip into negative territory by the fourth quarter of 2020.
“Consensus implies a ‘trough’ dividend capacity of 23c, but the primary difference here is we project $21bn in provision at WFC to cover 2.2% in cumulative two-year credit losses, vs. consensus of $14bn,” Najarian wrote in a note.
At this point, it’s unclear if the Fed will extend its new dividend rule beyond the third quarter. However, she said the market clearly seems to be pricing in a dividend cut from 51 cents per quarter to just 15 cents. Wells Fargo may be forced to either make a more aggressive cut or consider the possibility of two cuts in succession if the rule is extended.
Bank of America is forecasting a full-year 2020 GAAP EPS loss of 20 cents for Wells Fargo.
Benzinga’s Take: Wells Fargo will likely want to do whatever it can to avoid making a negative headline into two negative headlines by being forced to make two dividend cuts this year. At the same time, the company may be able to take advantage of come clever accounting to get it through its rough patch this year and avoid being forced to make additional dividend cuts.
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