Bank earnings will take center stage this week. Citi (NYSE:C), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC) will all report earnings on Jul 14. Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) post results on July 16. The heightened restrictions on banks ended the sharp rally in bank stocks last month. What will happen post-earnings?
The Fed’s demand for suspending any dividend hikes and share buybacks is a negative development for income investors. Banks cannot increase shareholder value under such restrictions. Instead, the government is nudging the institutions to increase lending. In raising liquidity levels and funds to less credit-worthy borrowers, banks will take on more risks.
Instead of weakening the health of its lending portfolio, banks are better off retaining earnings and increasing its cash on hand. It may increase provision write-downs further in the quarter. This will limit a rebound in the stock. At worst, it will hurt its share price further. But investors need only wait out the oncoming storm of defaults.
Wells Fargo’s 8% dividend yield is too high when the interest rates are at zero percent. Cutting it will let the bank re-deploy the capital back to the business. It may improve its efficiency through higher automation and spend on advertising. This will ultimately benefit its long-term investors.
