Citigroup faces growing pressure to cut dividend to repair balance sheet

As the bank reporting season begins, analysts say cash should be diverted from shareholder payouts to keeping the economy moving
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The Independent Online


The biggest US banks are coming under pressure to slash their generous shareholder dividends, to free up money that critics say should be employed instead for new lending to keep the economy moving.

The future of dividend pay-outs will top the agenda in the coming fortnight as banks report their financial earnings for the first quarter of the year. The bottom lines of many companies are again likely to be hit by multibillion-dollar write-downs on mortgages and credit market assets, and although investors are expecting that managements will focus on rebuilding their battered balance sheets, many companies still appear reluctant to take the painful step of cutting the annual dividend.

The issue is particularly acute at Citigroup, which reports on Friday, even though the financial giant has already cut the payout once since the credit crisis began last summer.

In a research note circulating on Wall Street, the bearish financial analyst Meredith Whitney of Oppenheimer & Co says Citigroup, led by chief executive Vikram Pandit, cannot afford to pay $6.7bn (£3.4bn) in dividends when it is expected to lose money this year.

"How anyone, let alone Citi's management and the board, can believe that its dividend is safe given this earnings scenario is beyond our comprehension," says Ms Whitney. "As we understand, Citi is aggressively pursuing selling non-core assets, but we hope the capital generated from these sales goes towards its own badly needed recapitalisation efforts rather than to pay dividends."

Citigroup and Merrill Lynch – which reports on Thursday – are among the Wall Street giants to have tapped foreign governments' sovereign wealth funds for new capital, but this strat-egy is illogical without dividend cuts and is very expensive, says Jim Sinegal, strategist at investment analyst Morningstar.

"Taking in capital with one hand and handing it out with the other at depressed stock prices is only good for the investment bankers getting paid to assist with the offering, and fearful market participants are currently demanding a high price for scarce capital," he comments. "Dividend cuts are another way to achieve the same goal."

Last month, Hank Paulson, the US Treasury Secretary, publicly called on banks to consider both new funding sources and dividend cuts to restore their financial firepower. Economists believe that shrinking bank activity is crimping the real economy, making it harder for businesses to find loans for new investment and forcing over-extended consumers to tighten their belts. In the global credit markets, debt issuance has shown a year-on-year contraction for nine consecutive months, the longest period of contraction since the early Nineties.

Bank shares drifted lower on the New York Stock Exchange throughout last week as investors girded for the coming results. JPMorgan Chase is the next major institution to report, this Wednesday.

Jamie Dimon, JPMorgan's chief executive, has emerged as one of the few heroes of the credit crisis, having scaled back the bank's interest in mortgage derivative trading well before the housing market turned south.

Last month, he stepped in to buy Bear Stearns, when a collapse of confidence among the investment bank's trading partners pushed it to the point of bankruptcy and threatened to destabilise the financial system.

Mr Dimon is this week expected to set out more details of his plans for the Bear Stearns business, including outlining the cost of a wave of redundancies at the acquired divisions. Some analysts believe up to half of Bear Stearns' 8,000 employees could be put out of a job, and a memo circulated among its 1,200 workers in the UK on Friday suggested lay-offs could begin in the next few weeks.

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