Options contracts are pricing in a continued plunge in bank dividends through next year, Goldman Sachs said Friday.
Dividend payments from the top seven bank stocks currently sit 30% below their levels from three months ago, analysts at the firm wrote in a note to clients. The options market believes the worst has yet to come, pricing 2021 dividends roughly 40% below their March levels.
The shift arrives as banks shore up cash to ride out the coronavirus pandemic, heightened loan risks, and the worst recession in nearly a century. Major banks’ first-quarter reports largely missed earnings expectations as more cash was diverted from profits to loan-loss reserves. Investors expect the firms to take additional protections against defaults through balance-sheet shrinkage and dividend cuts, Goldman said.
The biggest shift in 2021 dividend projections is with Wells Fargo and Citigroup stock, which have seen expected payments slide 65% and 44%, respectively, over the last three months, according to the analysts. Morgan Stanley’s dividend is the least expected to fall, with its 2021 projected dividend 23% lower from where it stood in March.
Should banks cut their dividends as projected, investors could expect a wave of selling to tank their stock prices. The top 25 income funds hold roughly $18 billion in bank stocks, leaving plenty of cash available for outflows. While a partial cut could drive a similarly partial exit from major bank stocks, income funds “would likely have to fully divest” from bank equities if dividends are fully slashed, Goldman said.
Stocks at greatest risk of a massive sell-off are PNC and Zion Bancorporation, the bank added.
