These 5 things need to happen for pro sports to return


It’s been over two months since the last professional sporting event took place in the U.S., but the time for sports to return may be on the horizon.

The NBA has looked into playing the rest of its season in a single city with fewer games, and Major League Baseball has discussed playing its entire season in Arizona.

But as sports leagues look to restart, there are a few guidelines they should follow to avoid the risks of the coronavirus pandemic. Dr. Glenn Copeland, medical advisor for the Toronto Blue Jays and advisor to QuestCap, a company working with sports leagues to bring sports back, says leagues should adhere to the following guidelines in order to make the return of sports safe for players, fans and stadium workers.

Divide facilities into three zones

“Each facility will have three distinct areas. The outside zone is the free zone where the world lives. The middle zone is at the entrance of the facility/arena where all participants, players, coaches, trainers, and equipment managers will be tested,” Copeland told MarketWatch.

The third zone is the “inner zone” where those who tested negative for COVID-19 can go. It’s also where the actual games and competitions will take place.


“Getting in is like getting into Fort Knox.”

These are guidelines for situations where there are no fans.

Every time a person wishes to enter the inner zone, they must first get tested in the arena entrance, aka the middle zone. No exceptions. When and if a person tests negative for coronavirus, they will be allowed to enter the inner zone.

Copeland outlines that it’s unnecessary for those who passed through the middle zone to wear any lanyards or wristbands to prove they have tested negative for COVID-19. This is because only those who are virus-free can enter that zone.

“Getting in is like getting into Fort Knox.”

People will be able to just walk out of the protected inner zone to enter the outside zone. Specialized personnel like players might get a quick temperature check and symptom check on the way out of the inner zone, according to Copeland, but most others can leave as they wish.

This concept is similar to how airports work — a series of checkpoints to get in, but leaving the protected area is as easy as walking out.

“Once the testing proves the participant is COVID-free, they will be allowed into the inner zone, which will be as COVID-free as possible. This testing will be done every day as the participants leave the outer zone and look for admission into the playing facility/inner zone,” Copeland explains.

Even in the outer zone, all people should be maintaining social distancing guidelines.

Test everybody, everyday

“Everybody. Anybody going to the inner zone. Media, players, coaches, cleaners, food service. Everybody,” Copeland says.

As stated above, testing will be conducted in the middle zone as a prerequisite to gain access to the inner zone.

Testing everybody going to the inner zone is more feasible because there will be “absolutely no fans” at the events, according to Copeland. While no official rules have been released about the presence of fans, most reporting on the resumption of sports indicates fans will not be present.

“It will include antibody/antigen testing, nasal swab testing when indicated, temperature checks, symptom checks, and evaluation by a healthcare provider before entering into the inner zone.”

Testing should occur every day for those attempting to enter the inner zone, regardless of symptoms.

Gather daily intel on all participants

“The gathering of all medical data on all participants on a day-to-day basis is also mandatory and much will be learned for the sports and the medical world as we continually monitor healthy athletes,” Copeland recommends.

Copeland recommends gathering data whenever people change zones. Test results, symptoms and temperature will be recorded in the middle zone by both league and team personnel with private data encryption software.

See also: Michael Jordan memorabilia explodes amid ‘Last Dance’ popularity

“Hopefully, we will be able to pick up early symptoms, whether it relates to temperature changes or physical symptoms or blood-work, that may indicate an early stage infection starting. Finds like these would be very helpful as we look at the new world of sports so that we may recognize possible early-stage infections and prevent the spread.”

As of now, sports leagues have not stated how present family members of players, coaches, or team personnel will be when the leagues resume play.

Athletes must change how they interact

“There can be no high-fiving, hugging, congratulatory slaps, or any close contact that is not part of the actual sport. Water bottles, towels, and other equipment like warm-up bats can no longer be shared,” Copeland advises.

Players going out of their way to avoid congratulating each other with a hug or high-five will seem strange to viewers but Copeland says it’s a major way to reduce risk.

Additionally, there is a higher risk factor in a sport like basketball than baseball when it comes to in-game contact. In baseball there is hardly any physical touching, while basketball players make contact with one another on almost every play.

“All equipment in the weight room and other areas will need to be sanitized between each player’s use. All uniforms and personal equipment will be sanitized on a day-to-day basis, including padding, helmets, jerseys, and undergarments. Every clubhouse should be fully sanitized at least twice every 24 hours.”

Social distancing must remain in place, even within the “inner zone”

“Social distancing in the clubhouse, lunchroom, weight room, and trainers room must be obeyed. Self-regulation by all participants will be very important…where these participants eat, sleep, and socialize will become most important,” Copeland says.

Copeland claims that even inside the safest of the three outlined zones, large gatherings should not be permitted.

“There will be no large gatherings, especially outside of the inner zone. Unfortunately, there will be no intermingling with fans, no signing of autographs, and no socializing with friends who are not part of the participating team.”

The NBA could be the first professional sport in the U.S. to resume, as the league is targeting a June or July resumption of play at the Walt Disney World Resort
DIS,
+0.16%

property in Orlando, according to The Athletic.



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Congress could kick China listings off U.S. stock exchanges, but it won’t happen overnight


The bill rushed unanimously through the U.S. Senate and spun into the news cycle as if it were a certainty.

As the thinking goes, the House and then the president will shuffle this legislation into law, forcing Chinese companies listed on U.S. exchanges to play by the same transparency rules as those from other parts of the world.


Senate bill would require Chinese companies to establish that they are not owned or controlled by a foreign government and submit to an audit that the Public Company Accounting Oversight Board can review.

Normally, powerful entities would make the passage of this “anti-China” bill an uphill battle. The Nasdaq
NDAQ,
+1.18%
,
the NYSE
ICE,
+0.98%
,
the Securities and Exchange Commission and Wall Street in general largely oppose the move and the yanking of billions of dollars from their pocketbooks. And House Speaker Nancy Pelosi said Thursday that her side of the Capitol was willing to look at the issue, but no vote was promised.

But the legislation comes amid a striking U.S. political competition of sorts to show who is toughest on China — and during the crucial few months before the presidential election.

Also from Tanner Brown:U.S.-China relations are bad and getting worse, with major ramifications for trade and investment — and the U.S.’s presidential election

Even if a variation of the bill does eventually pass, already-listed firms will have three years to comply. That is ample time for China to increase the attractiveness of its own bourses, and for Chinese companies to prepare for a relatively smooth landing back home — likely Hong Kong for larger already-listed companies, and the growth boards for smaller startups, according to Peking University’s Paul Gillis.

China has already opened more attractive doors for public fundraising. After the decade-old Nasdaq-like ChiNext welcomed tech startups in Shenzhen, neighboring Shanghai learned from the pains and successes of that venture and unveiled the Science and Technology Innovation board, or Star Market, last year. Its niche is profit-losing tech-focused startups that show promise and otherwise might list in New York.

As of now, some 200 Chinese companies are listed in the U.S. — some in ways more transparent than others — possess a total market value of more than $1.8 trillion, according to the U.S.-China Economic and Security Review Commission.

Their departure would represent a big flight of capital from U.S. exchanges, a diminution of U.S. tax revenue, a loss to investors and, some would argue, a prestige hit for Wall Street as the center of global finance.

But it would also mean those willing to buy into U.S.-listed firms from China wouldn’t be duped like they were recently by Luckin Coffee, whose shares
LK,
-30.84%

resumed trading this week after a six-week freeze. Luckin’s American depositary receipts tumbled 36% on Wednesday from their closing price on April 6, after which trading was halted by Nasdaq. The stock plummeted 89% in the first quarter of this year. It ended the week at $1.38, against a closing level above $40 as recently as March 6.

Nasdaq has informed the onetime Starbucks
SBUX,
-0.55%

rival that it faces delisting after it disclosed that some employees fabricated $300 million in sales. Luckin is appealing the decision, but if it’s delisted investors would lose essentially all equity, a “wipeout” for which one analyst warned investors to prepare.

A Luckin Coffee location in Beijing on Jan. 15, before the fast-expanding chain — billed as a potential Starbucks slayer — was engulfed by controversy.


Bloomberg

Opinion:Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

“A lot of these companies, by the way, have already had scandals and cost investors a lot of money, because of their failure to be transparent in their reporting,” White House economic adviser Larry Kudlow told Fox News. “The Chinese government forbids that kind of transparency.”

The painful delisting decision may still be bothering Wall Street and the SEC, but lawmakers appear ready for action.

“We want investors to understand what they’re investing in,” said Sen. John Kennedy, a Louisiana Republican and a co-sponsor of the Senate bill. “And those reports have to be accurate or you get in a lot of trouble.”

Tanner Brown covers China for MarketWatch and Barron’s.



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Thyssenkrupp overhaul must happen faster due to COVID-19: CEO By Reuters


© Reuters. FILE PHOTO: Thyssenkrupp’s logo is seen outside elevator test tower in Rottweil

DUESSELDORF (Reuters) – Thyssenkrupp (DE:) has less time for a wide-ranging restructuring plan than previously thought as the coronavirus pandemic is significantly burdening the already ailing conglomerate, its chief executive said in a note to staff.

“The difficult economic situation at Thyssenkrupp is being significantly intensified by corona. The company is in a serious situation,” Merz said in the note dated May 8 and seen by Reuters.

Late last month the group secured about 1 billion euros ($1.1 billion) in state aid to tide it over until it receives the money from the sale of its elevator division, two sources told Reuters.

In her note, Merz said restructuring moves, cost cuts and, above all, measures to increase sales that the group had planned to implement over the next two to three years needed to be implemented significantly faster due to the pandemic.

“Moving boundaries, thinking boldly, not ruling anything out – we really need to buckle down to the next plan,” she added.

Merz said the longer the pandemic lasted the more it was eating up the expected proceeds from the sale of its elevators unit, adding management would discuss this with the supervisory board on May 18.

Thyssenkrupp in February agreed to sell its elevator unit to a consortium led by Advent and Cinven for 17.2 billion euros and to reinvest 1.25 billion euros of the proceeds in the business.

The closing, which Advent and Cinven said would take place by the end of September, could already happen over the summer, Merz said. Until then the group is bleeding cash, Merz said, adding that was why the company had talked to state-owned bank KfW about additional funds.

Thyssenkrupp is scheduled to publish second-quarter results on May 12. Merz said she did not expect industrial demand to recover soon.

($1 = 0.9225 euros)

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Bank Dividend Cuts Likely – Here’s Why And What Could Happen Next


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 examples.

During its April earnings call, Bank of Marin Bancorp (BMRC), a highly regarded $2.7 billion California community bank, reported that “approximately $322 million in loan relief requests or conversion to interest only or payment deferral” had been made as of April 14. That number represents 17% of the bank’s March 31 loan balance.”

Ally Financial Inc. (ALLY), a $167 billion auto lending bank, experienced even higher borrower deferral requests as the bank’s CFO reported during its April 20 earnings call:

“If you look at our forbearance population, starting first within retail, it’s 1.1 million customers. It’s about 25% of our accounts, a little bit higher than that in terms of the balances… On the commercial side, we have about 73% or so of our dealerships that are taking advantage of payment deferral.”

During its April 23 earnings call, the CEO of Umpqua Holdings Corp. (UMPQ), a $29 billion regional bank headquartered in Oregon, provided this insight that speaks to the disruption the Covid-19 shut-down is having on small businesses.

“… in a normal year Umpqua generates approximately $140 million in SBA loans. In less than two weeks, Umpqua produced more than 10 times a typical year’s production…”

Bank of Marin, Ally, and Umpqua are just three of the nation’s nearly 5,000 banks. Few of the nation’s banks will dodge the need to provide temporary assistance to customers. Huntington Bancshares Incorporated (HBAN), the top small business lender in the Midwest, reported earlier in April that it expects that it will do a year’s worth of small business loans (35,000 loans) during the first week of offering the new Paycheck Protection Program. Huntington is certainly not unique in its PPP experience.

The Covid-19 Crisis has inflicted enormous damage to the cash flow and balance sheets of consumers and businesses. What’s even more troubling, as the US Jobless Claims chart shows, the nation is just five weeks into this crisis. No one knows when the economy will begin to heal.

Implications

Accounting: The chief accounting officers of banks must be working overtime to determine the appropriate accounting policies needed during this unprecedented time. The full extent of their work will become more apparent in the 2nd quarter as banks release standard quarterly reporting. Because banks operate under strict accounting standards, banks will have limited ability for “creative” accounting that could conceal the full impact of loan forbearance programs.

Regulatory: Much to their credit, US bank regulators (the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC) appear to have been highly responsive to the need for banks to receive their own forbearance from restrictive accounting and regulatory rules. Evidence can be seen at the OCC’s website which provides a list of actions it has taken to give banks some regulatory relief during this time. The Federal and FDIC have done likewise.

Economic: High performing typically have an Efficiency Ratio close to 50. This ratio is calculated by dividing non-interest expenses (personnel, occupancy, other) into adjusted operating income (essentially, net interest income plus non-interest fee income). A low ratio means the bank is more efficient. All banks that enter into borrower forbearance programs stress their Efficiency Ratio. The nation’s least efficient banks, which are almost all community banks, will feel the stress sooner and most acutely.

Political: Bankers and regulators must not ignore the politics of banking. The longer banks wait to announce dividend cuts when so many Americans are unemployed, the greater the likelihood that bank dividends will become an election year political issue.

2. Jamie Dimon Foreshadowed Dividend Cut on April 6

JPMorgan Chase & Co. (JPM) released its 2019 Annual Report on April 6. The annual report included a 22-page letter from its inestimable chief executive officer, Jamie Dimon. In the letter Dimon gave a not-so-veiled warning about the bank’s dividend.

“… we have run an extremely adverse scenario that assumes an even deeper contraction of gross domestic product, down as much as 35% in the second quarter and lasting through the end of the year, and with U.S. unemployment continuing to increase, peaking at 14% in the fourth quarter. Even under this scenario, the company would still end the year with strong liquidity and a CET1 ratio of approximately 9.5% (common equity Tier 1 capital would still total $170 billion). This scenario is quite severe and, we hope, unlikely. If it were to play out, the Board would likely consider suspending the dividend even though it is a rather small claim on our equity capital base. If the Board suspended the dividend, it would be out of extreme prudence and based upon continued uncertainty over what the next few years will bring.”

A friend called me immediately after reading Dimon’s letter and said, “Jamie is preparing investors for a dividend cut.” I think my friend is right.

Four days later JPM’s economists reported that their 2nd quarter GDP forecast had dropped to a staggering -40%. Note that the -40% second quarter GDP number is worse than the extremely adverse scenario of -35% referenced in Dimon’s April 6 letter to shareholders as well as worse than Fed Stress Tests.

Here is what JPM’s CFO had to say during the bank’s Q1 earnings call on April 14 about the sudden decline in the economy.

“…as we closed the books for the first quarter, just to give a context, we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%….Since then, as I noted in my prepared remarks, our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That’s obviously materially different.”

Implications

As the nation’s most respected banker, expect JPM’s CEO to be among the first banks to announce a dividend cut. By leading the way, Dimon will give other bank CEOs the air coverage to cut their own banks’ dividends. If and when dividend cuts are announced, expect Dimon, other bank CEOs, as well as regulators and the Trump White House (accountable for the political appointments at the FDIC and OCC) to state emphatically that banks are well-capitalized (see below) and the banking system safe and sound.

Reason #3: Provision Expense Will Hit 11-Year High in Q1 2020

Regular readers of my bank writing know that one of my favorite bank metrics is “Provision as a % of Loans.” I like this metric because it is highly correlated with bank profitability. Based on my review of first quarter earnings reports from 40 banks, I estimate that the banking industry’s 1Q 2020 Provision/Loan rate to hit a 10-year high of.63% as can be seen in Figure 2. It should be noted, as the chart shows, a pop in Provision one quarter is almost always followed by several quarters of elevated Provision expense.

Figure 2

Before discussing the Provision/Loan rate in further detail, it is helpful to examine the 1Q 2020 Provision/Loan rate of 35 banks as reported in their press releases during the past two weeks. See Figure 3.

Note that Provision rates vary tremendously across banks depending on business strategy. Banks like Capital One Financial Corporation (COF) that focus heavily on unsecured consumer credit have high Provision rates. Banks like First Republic Bank (FRC) and Northern Trust Corporation (NTRS) that serve highly affluent clients historically have had low Provision rates. Megabanks like JPM and Bank of America Corporation (BAC) have business models that cut across multiple customer segments, so they report Provision not only for the enterprise but for individual lines of business.

The Covid-19 Crisis wreaks terrible financial damage to Americans living paycheck to paycheck. Banks serving the “Mass Market” segment are most likely to see the biggest spikes in Provision expense in the quarters ahead if the economy does not get back on firm footing a few months from now when government transfer funds are exhausted.

Figure 3

Figure 3 reveals that banks are all over the board when it comes to Provision/Loan rates for the first quarter. Without getting into a lot of detail, a few headlines observations can be made.

First, banks are flying blind into the Covid-19 Recession (Depression?). Given that there is no precedence for what banks are now enduring, they are struggling with a profound number of unknowns. First quarter earnings calls included these comments about “unknowns” and “uncertainty” from several of the nation’s leading bankers.

“… a lot will depend on the ultimate effect of these extraordinary programs and how effective they can be in bridging people back to employment. And we’re going to still have a number of unknowns… but we’re going to learn a lot through these next few months that will inform our judgment for second quarter reserves.” (JPMorgan Chase CFO, April Earnings Call)

“Sitting here today, there are many unknowns, and the year will look quite different than we expected the last time we spoke.” (Wells Fargo & Co. (WFC) CEO, April Earnings Call)

“Obviously, there are many unknowns including how government, fiscal and monetary actions will impact the outcome… But perhaps the biggest unknown is how long economic activities and conditions will be significantly impacted by the virus.” (Bank of America Corporation (BAC) CFO, April Earnings Call)

“So, trying to give you some precise science with all of these unknowns out there, I just — I don’t think it’s a useful exercise.” (The PNC Financial Services Group, Inc. (PNC) CEO, April Earnings Call)

“And, obviously, right now, there are a lot of unknowns, a lot of uncertainty.” (Comerica Inc. (CMA) CEO, April Earnings Call)

“Significant uncertainties as to future economic conditions exist.” (Texas Capital Bancshares, Inc. (TCBI) April Earnings Press Release)

“… the near-term level of uncertainty is unprecedented…. In this environment of uncertainty, it is hard to predict what can or will happen and the impact it will have on us.” (1st Source Corporation (SRCE) April Earnings Press Release)

Second, further complicating the Provision picture in the first quarter was the long-anticipated and much-loathed introduction on January 1 of the Current Expected Credit Loss methodology – i.e., “CECL” — by the Financial Accounting Standards Board. While this article about bank dividends is not the place to vent my eight years of frustration with the FASB’s wrong-headed decision to impose a new and unreliable methodology for bank Provision expense, I must say that the new rules could not have come at a worse time. US bank regulators apparently agreed as they pressured FASB to back off on the timing of CECL’s introduction which FASB finally did on March 27.

However, FASB’s last-minute reprieve did not help the banks since most had already finished their CECL analysis and reporting much earlier in the quarter. Back to Figure 3, it is important to note that almost all banks reported Provision in Q1 reflecting the adoption of CECL which caused many banks to increase their Loan Loss Allowance (a contra asset) which is funded by Provision expense.

Here is an example: Synchrony Financial (SYF) had a Provision expense in Q1 equal to 11.13% of its quarter-end loan balance; of that total, $3.12 billion of the bank’s $9.175 billion in first quarter Provision was related to a one-time (?) adjustment to the Loan Loss Reserve because of the new CECL rules.

While the expected .63% Provision rate for the industry is high and disconcerting, it must be noted the untimely introduction of CECL, as can be seen in the Synchrony example, adds considerable “noise” to the Provision number at a time when the economy is falling off the cliff.

However, even absent the impact of CECL, Provision in the 1st quarter would have jumped to a ten-year high based on my analysis of the Provision expense of the big banks. My best guess is that industry-wide Provision without CECL would have been approximately .50%.

Figure 4 shows the Allowance for Loan Losses for a group of banks as of March 31. Many bankers, myself included, regard the Allowance as another form of equity that cushions banks from loan losses.

Figure 4

Implications

First quarter earnings reports are ancient history at this point. The focus is now on second quarter Provision and bank earnings potential until a vaccine is available and the economy healthy again. Banks are not alone in flying blind. So too are bank investors. Evidence can be seen in the following chart that shows the stunning range of 2nd quarter earnings estimates for the nation’s five biggest banks. Figure 5 indicates that there is no consensus among bank analysts about bank earnings and Provision expense for second quarter. Bank investors are wise to proceed cautiously before adding to bank holdings.

Figure 5

Investors in Wells Fargo will want to be especially alert to any announcements the bank might make about Provision and Loan Loss Allowance prior to its 2nd quarter earnings report in July. As figures 3 and 4 show, WFC has materially lower Allowance than peers. This suggests WFC has a more pristine credit portfolio than peers. Time will tell.

Reason #4: Federal Reserve Bank President Urges Banks to Reduce Dividends

On April 16, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and 2014 candidate for governor of California, wrote an op-ed for the Financial Times calling for banks to do “the most patriotic thing they could do today” by deciding “to stop paying dividends and raise equity capital, to ensure they can endure a deep economic downturn.”

Kashkari has a reputation for being outspoken. Readers of his op-ed must pay heed to his warning that “stress test modelling by the Minneapolis Fed indicates that under severe Covid-19 scenarios, large banks, those with assets greater than $100bn each, could together lose hundreds of billions of dollars of equity capital.”

To lose “hundreds of billions” is an ominous statement coming from a Federal Reserve Bank president. Figure 6 puts that number in perspective. This chart shows that banks lost $179.6 billion over the five quarters starting Q4 2008. In contrast, banks earned $236 billion in 2019.

Figure 6

Figure 7 indicates that banks in 2019 paid out cash dividends of $184 billion. Kashkari argues that banks should save the cash and retain capital in the near term to offset losses the Minneapolis projects under a severe Covid-19 scenario.

Figure 7

Against the backdrop of Kashkari calling for banks to hold back dividends and build capital, it is crucial that bank investors understand that banks today are better capitalized than at any other time in history. Figure 8 shows that the industry’s Tier 1 Risk-Based Capital Ratio is 30% higher than in 2008. As of 12/31/2019, the FDIC reported that banks collectively held $1.73 trillion in Tier 1 Risk-Based Capital and $2.11 trillion in Total Equity Capital. The good news is that the industry has significant capital to losses.

To that point, nearly every bank chief executive officer touted their bank’s capital as a source of strength during first quarter earnings calls.

“Our balance sheet remains strong with sufficient capital” (Ally Bank CEO, April Earnings Call)

“We remain well-capitalized” (U.S. Bancorp, (USB) CEO, April Earnings Call)

“We have solid liquidity and capital positions” (PNC CEO, April Earnings Call)

“We have deep liquidity reserves and a strong capital position.” (Capital One Financial Corporation, (COF) CEO, April Earnings Call)

“We entered this crisis in a very strong position from a capital, liquidity and balance sheet perspective.” (Citigroup Inc., (C) CEO, April Earnings Call)

“The bottom-line is that we have the strongest, highest quality balance sheet in our history including ample liquidity.” (SVB Financial Group (SIVB) CEO, April Earnings Call)

Figure 8

Implications

The potential for a loss in the hundreds of billions of dollars cannot be discounted given the vast number of unknowns bankers face today.

While the industry is well-capitalized, a loss of $200 billion would prove painful. A loss of the magnitude of $800 billion would be a game-changer that would raise safety and soundness concerns and put hundreds of banks out of business. (The U.S. has roughly 5,000 banks.)

My informed guess is that the industry can absorb $100 billion to maybe $300 billion without needing to go to the capital markets for highly dilutive new capital. As a long-term bank investor, I would prefer to see my banks reduce or even eliminate dividends temporarily if the action significantly reduces the probability of the bank needing to go to the capital markets for an equity infusion.

Reason #5: The Market Appears to Price Dividend Cuts into Current Bank Stock Prices

Reason #5 is another informed guess. It is my current view that dividend cuts are largely factored into bank stock prices today. Of course, that does not mean bank stock prices cannot drop further. Certainly, they can and likely will.

Figure 9 shows the median dividend yield for 69 banks that pay dividends. First, a caveat. The 69 banks do not include banks that failed in 1990-92 or 2008-10. Had failed banks been included in the data set, most probably the yields shown below in October 1990 and February 2009 would have been modestly higher. In this respect, the data set reflects survivor bias, meaning the banks in this population were strong enough in prior recessions to survive. A second caveat is that not all 69 banks have paid dividends since 1990; of the group, 41 have done so since 1990.

The chart shows that the 4.23% median yield on April 23 is at a peak seen historically only at times when the industry is on the brink of or during a recession. In the past when dividend yields have been this high, bank failures were unfortunately common. Nearly 3,000 banks and S&Ls failed from 1987-1992 and another almost 500 failed from 2008-2012. This is not to say that I expect banks to fail in the near-term, but dividend yields in April 2020 correspond to the yields seen at two other times of extreme bank stress.

Figure 9

Figure 10 is a scatterplot for 69 banks that shows the dividend yield (X-axis) and Z-score (Y-axis) for the current dividend yield. The Z-score provides a view of how the current yield compares to history (reflecting average as well as volatility).

Banks noted with red letters are banks that have current yields in excess of 6%. My research of bank dividend yields in 2008-09 shows that all but two banks that had dividend yields greater than 6% at that time eventually cut their dividend.

(The two exceptions are both headquartered in Upper State New York: Community Bank System, Inc. (CBU) which is among only 31 banks that raised their dividends in 2008 and 2009; the other bank is M&T Bank Corporation (MTB) which at the time was led by the legendary Robert Wilmers whose irascible spirit and sterling record for strong performance would not allow the bank to cut its dividend during the Great Panic. By the way, Wilmers was Warren Buffett’s favorite banker for years.)

On the other hand, banks that either maintained their dividend or increased it during the Great Panic (apart from the CBU and MTB), never saw their dividend yield exceed 6% during the tumultuous 2008-2009 timeframe (as calculated at month-end for those two years).

Figure 10

Figure 10 suggests that the market is already pricing in dividend cuts from the banks with dividend yields greater than 6%. No surprise, during 1st quarter earnings calls, executives of these banks were questioned about the dividend. As a group, the common answer was that the bank was determined, for now, to preserve the dividend. Here are comments about dividends from executives from five of the banks noted in red letters:

“… we think the dividends, certainly that we’re paying, makes sense. But as I alluded in my prior comments, we don’t know what the future looks like based upon the assumptions that we’ve laid out in these very stressed environments.” (Wells Fargo CEO, April Earnings Call)

“… we do stress tests for dividend… how the future might play out with COVID over the next several quarters… we feel good about dividend and believe it can be maintained.” (Comerica CEO, April Earnings Call)

“And our stress testing through the most severe adverse scenarios, we assume that we continue with the dividend at current levels. And that’s our working assumption that we continue to manage the dividend at current levels…” (First Horizon National Corporation (FHN) CEO, April Earnings Call)

“We expect to remain well capitalized and intend to maintain the dividend at the current level.“ (Citizens Financial Group (CFG), CEO April Earnings Call)

“And so as we look forward, the regulators may come to a point that where they are recommending that the large banks do suspend dividend if they believe that the things are too dire. But I think that most banks would believe that we’re well positioned to continue to support those based on what we’re seeing in the economy today and based on our capital levels that we maintain.” (KeyCorp (KEY) CFO, April Earnings Call)

“Our intention is to maintain the dividend at the current level. We think that we’ve got the right capital levels to support that, and we’ll continue to monitor it and model, but we think it’s the appropriate and sustainable level for now.” CFO Huntington Bank CFO, April Earnings Call)

The banks noted in black letters at the top of Figure 9 have current dividend yields that are significantly higher than recent history. Bank OZK (OZK) and Hancock Whitney Corporation (HWC) are two banks with a current dividend yield approaching 6% as well as much higher than each bank’s historic average dividend yield. These two banks may be the next to see their yields eclipse 6%.

Banks noted in green letters appear to be the banks the market least expects to cut dividends. Not only is CBU among these banks, but also Commerce Bancshares, Inc. (CBSH) and First Citizens Bancshares, Inc. (FCNCA). These are two of my favorite banks. CBSH, like CBU, raised its dividend during both 2008 and 2009. Both CBSH and FCNCA, despite being large banks, are both family-controlled, a factor that I consider to be a huge plus for bank investors.

Figure 11 is a bit messy. It shows the stock price by week of 13 of the nation’s largest bank stocks during 2008 and 2009. It shows that bank stock prices at that time tended to decline in anticipation of dividend cuts. In most cases, when the dividend was cut, the stock price started to flatten if not gradually increase.

Figure 11

Figure 12 shows the absolute change in stock price percentage for the 13 banks from year-end 2007 to year-end 2009. The only bank among the 13 to not cut its dividend during this time was Northern Trust Corporation (NTRS). Banks that cut dividends in 2008 (e.g., KEY, RF, FITB) tended to have much steeper price drops than those that cut in 2009 (e.g., WFC, USB, JPM). A strong case can be made that banks that cut their dividends in 2009, in fact, did not need to do so, but likely did in response to regulatory pressure. (See Chapter 9, “Buffett’s Two Favorite Banks,” in my book, Investing in Banks.)

Figure 12

A case may be made that dividend cuts are already priced into bank stock prices. Figure 13 shows the dramatic drop in stock prices for the 13 large banks from the prior two charts. The average bank in this group shows a decline in stock price of -39%. (In contrast, the S&P 500 is down -3% YTD as of April 23.)

Figure 13

Conclusion: What I Expect

Let me preface my conclusion by saying that I believe the United States is blessed today to have the finest generation of bank executives in the nation’s history. Many of this generation of top bank CEOs have at least a decade of experience in their position. The Great Panic of 2008-09 helped to prepare them for today’s crisis, a time that will require wisdom on not only the part of bankers but regulators and politicians.

While the Dodd-Frank legislation led to many unintended consequences, its most lasting impact is the creation of the Stress Test. Overseen by the Federal Reserve, the Stress Test equips both bank supervisors and bank executives to have a game plan for addressing a time like the one we find ourselves in. I am confident that the Fed together with the OCC and FDIC will show the measured judgment needed for the months ahead.

I expect Jamie Dimon and CEOs of several other large banks to announce a temporary dividend cut some time during the next six weeks. When they do, they will affirm their bank’s capital and earnings strength. In so doing, bank CEOs will be rebutting any suggestion that banks need to raise equity through new shares, an action that would be much more detrimental to current shareholders than a temporary suspension of dividends.

Bank CEOs will likely speak to the need for shared sacrifice at a time when 26 million (and still counting) of the nation’s bank customers lost jobs and cannot pay back—at this time—their loans. As banks need to forebear on collecting interest and principal, so too will bank owners need to forebear on collecting dividends.

Of course, bank CEOs will act in tight coordination with bank regulators and the Trump White House. Expect the US Treasury and Federal Reserve to announce a plan to give banks further temporary relief from critical capital and earnings ratios that would normally trigger aggressive regulatory action.

Restoration of bank dividends is likely dependent on a full rebound of the US economy. At present it seems a full rebound will only be possible when either a Covid-19 vaccine is available or “herd immunity” is achieved.

Further complicating the timing of the restoration of bank dividends are the political uncertainties that will not be answered until November. Regardless of which party prevails in November, bank investors are best served if banks are viewed as part of the solution to the Covid-19 Crisis, not part of the problem.

Finally, do not expect all US banks to cut dividends during the Covid-19 Crisis. While larger banks are more likely to reduce or eliminate dividends during the next several quarters, smaller, well-capitalized banks with strong credit performance should be able to preserve current dividends.

Disclosure: I am/we are long JPM, CBSH, SIVB, BMRC, SRCE, HBAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a former Bank of America employee, I have material financial interests in BAC.





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What Will Happen To My Dividends If The CoronaVirus Gets Really, Really Bad


I’m a retired dividend investor. I endeavor to almost never sell stocks, and I do my level best to avoid making investment decisions based on my own (or anyone else’s) guesses about the future. Instead, I rely almost entirely on the power of compounding. I try to save what I can, and I regularly reinvest dividends into more shares so I can grow my portfolio income exponentially. I also limit my investments to companies that I think offer products and services that will stand the test of time and the vicissitudes of fortune, and I have to say that I strongly prefer companies with long histories of steady and rising dividends that are backed by an ample cushion of steady earnings. My portfolio dividends currently come in at about 240% of my core living expenses, and I keep enough cash to cover about a year’s worth of expenses.

But I’m becoming extremely nervous.

Yesterday, I decided to go grocery shopping. I tend go in middle of the afternoon on a weekday, when the store is typically empty. This time the place was thronged with people and some of the shelves had been totally picked over. The look on shoppers’ faces was not panic, and there was no shoving. But nobody was smiling. The first case of Coronavirus in Lisbon was announced recently, and I know that it is only a matter of time before the government closes off the borders. It’s unclear from the President’s address to the world yesterday, but I don’t think I can catch a flight back to America for the next 30 days. And believe you me, it didn’t help my spirits much to watch the Dow Jones crash another four figures moments after the market opened today. You’d think I’d be used to it at this point, but hey. Call me a slow learner.

So I do what I always do when I feel terrified by the future. I pour myself a stiff drink, put on my reading classes and lose myself in a shroud of data and history.

Ahhhh. Now that’s better! As you and I gaze out over the calm waters of the past hundred years, we can now just barely make out three basic categories of dividend disasters in the distance: the ho-hum, the bad and the truly cataclysmic.

How many of you remember the financial crisis of 2008-2009? This is an example of what I am going to name as a “ho-hum” dividend disaster. According to Dividendchannel.com, for 2007, the SPDR S&P 500 Trust ETF (SPY) paid an annual dividend of $2.71 per share. Let’s say that the high point of the financial crisis broke from the middle of 2009 to the middle of 2010, by which time SPY paid an annual dividend of $2.15. That’s a drop of nearly 21% over a two-year period.

The financial crisis felt terrifying at the time, but was remarkably short-lived when measured in terms of dividend payments. Like a flash in the pan, SPY not only recovered its previous high in 2012 for annual dividends paid, but actually paid dividends of $3.10 per share (up 15% from 2007). Dividends have risen substantially since then. Not bad for an index that does not even attempt to focus on steady dividend growth stocks.

Moving right along, we spy the next ship on the horizon that I will classify as a “bad” dividend disaster. We’re talking about the period between 1929 through the end of WWII. Using free online data From Robert Shiller’s homepage, the monthly (inflation-adjusted) dividends for the S&P 500 clocked in at an average of $13.69 in 1929. In the immediate aftermath of the greatest market crash of all time, the average dividends for the S&P 500 then actually rose all the way through the early part of 1932, reaching a high of $15.61 for January 1931. Surprising, isn’t it? It wasn’t until the onset of the Great Depression that things really began to take a serious turn for the worse.

By May 1935, the average monthly dividend payment for the S&P 500 sank to a low of $8.25 in inflation-adjusted terms. In other words, over a period of 4 years starting on the day the stock market paid its highest dividend in 1931, dividends fell by 47%. Looked at another way, the average annualized monthly dividends on the S&P 500 amounted to $15.07 in 1931 and sank to a low of $10.62 by 1936 – a loss of about 30%. Dividend cuts are like eating overcooked steamed broccoli. You push them around on the plate and examine them from different angles until you can finally muster the strength of character to just swallow them and move on.

Vile as it may have been, that particular dividend catastrophe proved fleeting. By the middle of 1937, slightly less than six years later, the average monthly dividend for the S&P 500 rose to $13.98 and then vacillated around that number until WWII (during which period dividends remained fairly constant in nominal terms, but sank in real terms due to conditions such as rationing and wartime inflation).

You don’t see real dividend growth resume until after the war, and by 1950, the average monthly dividend for the S&P 500 climbed back to $13.48 in inflation-adjusted terms. Not exactly a dividend grower’s dream, but not chopped liver either.

The good news is that from the 1950s onwards, dividends either were steady or rose on a fairly consistent basis all the way through 1999, reaching a high point of $25.47 (inflation-adjusted) in July 1999. It was at that point that S&P 500 dividends sank to a low of $22.42 on August 2002, representing a peak to trough decline of 12% during the post-September 11th internet bubble burst.

On the dividend Richter scale, the 2001 internet bubble burst doesn’t even register as “ho-hum.”

And that brings us to the very last category of dividend disaster, which I like to call “the dividend cataclysm.” There is only one dividend disaster that truly falls into this category. You guessed it – the global Spanish Flu pandemic that started in January 1918 and ended sometime in 1920.

Dividends for the S&P 500 came in at a high of $12.93 (in real terms) for December 1917, and then drifted down steadily until 1920 to a low point of $6.30 – a total loss of just over 50% over a two-year period. Another less alarming way to look at is that the average annualized monthly dividend prior to the Spanish Flu pandemic came in at $12.62, and then sank 45% over the space of three years to an annual monthly average of $6.88 in real terms.

It was a quick and painful three years. By mid-1920, dividends began a long and slow recovery until they reached what was then a historic high in 1929. Just in time for the next crisis.

Let us step back and put today’s crisis into its proper 100-year historical context. The takeaway should probably be that dividends for US companies (including those with no dividend policy or only a sporadic one) remain fairly consistent most of the time but can experience declines between 12% and 45% over 3-5 year bursts (occasionally followed by lengthy periods of low or no real growth). This happens during the absolute most horrendous catastrophes known to modern history. So, what does that tell us about our situation today?

We can debate that. Perhaps you have a point of view that you wish to air in the comments section to this article (which I gladly encourage you to do). I’ll preface what I’m going to say next by offering you my solemn guarantee that I have no better idea than you do (although that certainly has never stopped me from pontificating from my chair). It seems to me like today’s crisis has all of the piquant and lively flavors sampled from each of the three dividend disasters over the last century. Rampant disease, severe stress in the credit markets, and political leadership that demonstrates a succulent melange of gross incompetence, crass buffoonery and hopeless dysfunction. Of course, there are huge differences between today’s crisis and those of the past 100 years. Medical advances since 1918 can only be described as miraculous. That’s the good news. On the other hand, the AI-enhanced financial derivatives weapons of mass destruction can reallocate wealth between buyers and sellers at blinding speeds that a trader in 1929 could not even conceive of.

Honestly, I don’t have the next clue what comes next, so I’m focused on the only thing that I can control right now: what do I plan to do with my investments. I’m expecting dividend cuts and potentially nauseating declines in the stock market. The obvious solution (as far as I can see) is to limit my spending and reinvest my dividend savings into as many shares as I can get my greedy little mitts on.

HUH????!?!?!?!?!?

WHAT?!?!?!?!?!?

WHY?!!!!! Don’t you think I should be worried about risking massive declines in my portfolio?

Friends, I might look it, but I’m not actually crazy.

Historically speaking, why don’t you ask me what happened to investors who reinvested dividends during the most horrendous dividend disasters of all time? Turning again to Robert Shiller’s data, we see that if you went into the 1918 Spanish Flu pandemic owning 100 units of the S&P 500, you’d be earning monthly annualized income of $108.69. Suppose you reinvested all dividends back into as many shares as you could buy at whatever the prevailing price was for every month during the pandemic. Your portfolio income would hit a low of $64.08 in June 1920, representing a total income loss of 41%, and would reclaim its prior dividend high by Christmas of 1924. 6 years and a 41% loss – that’s definitely “bad” on the dividend disaster scale, but not quite as catastrophic as it would have been otherwise.

Moving right along, if you went into the crash of 1929 with 100 units of the S&P 500, you’d enjoy dividend income of $116, which would go on to rise all the way to a high of $139.55 by 1931 and then decline to a low of $94.55 by 1934 – a loss of only 18.5% from stem to stern over a 5-year stretch. Why, that’s a dividend decline that only registers as a “ho-hum” on the dividend disaster scale!

And last of all, what about 2008? If you started with 100 S&P 500 units, you’d enjoy a high of $289.77 dividend income in December 2008 that would hit a low of $222.99 in March 2010 (a loss of 23%) and then rebound fully by June 2012. 4 years and 23%. Fun? No. Manageable? Who am I to say, but at least you and I can probably agree that a result like that is way better than what would have happened had you panicked, sold and run away into the bushes like a scared rabbit. And as of December 2019, your income would be over 100% higher than it was in 2017, clocking in at $609.48. Which sadly might be the highest point that you or I will see for a while, depending on how this crisis plays out from here.

In the investment game, it’s more about mitigating the damage than trying to avoid it altogether. That’s the real reason you’ll find me skipping restaurants and parlaying the savings into more income-producing shares.

I’ll leave you with just one last chestnut of historical data to chew over. Looking at the worst dividend disasters in history, what is the average dividend disaster in terms of magnitude and length of time to recovery? If you are a dividend compounder who invests and reinvests in the S&P 500, the answer is a 27.5% dividend cut from which it takes 5 years to recover. If it helps you, go ahead and remind yourself of that statistic whenever you watch the Dow Jones drop 7% a day every day for weeks on end.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not an investment advisor, and this is not investment advice. I don’t guarantee the accuracy of any of the data used in this article, or my computations. I make dumb mistakes all the time, which is why I included a link to the data and computational spreadsheet.





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