Here’s how bank dividends are at risk if Democrats sweep election, Bank of America warns

Dividends of US lenders could be at risk if there is a Democratic sweep in the presidential elections, Bank of America said in a research note.

The research comes before the highly anticipated US presidential election, which has been marked by the Covid-19 pandemic and an increase in civil unrest throughout the country.

According to the polls, Democrat Joe Biden holds a clear polling advantage over President Donald Trump, though his lead is narrower in key swing states.

In the case of a Democratic sweep, or a so-called blue wave, “if [the] recession is prolonged into the new administration and new heads of agencies are appointed, dividends may be at risk,” analysts Erika Najarian and Ebrahim Poonawala said.

The US Federal Reserve capped dividends – unlike its European counterpart which banned them – saying that banks’ third quarter dividends could be no higher than 2019’s and no higher than its average earnings for the four quarters ending 30 June. The regulator deferred decisions on future dividends until the impact of the pandemic is clearer.

“Biden will likely reinstate greater regulation, particularly around climate change initiatives. Other areas would likely include strengthening Dodd-Frank and increasing access to banking for the underserved communities,” the analysts wrote of the banking sector.

The bank’s research, published on 29 October, examined how different sectors would be affected by outcomes including a split Congress for either Trump or Biden, or a Democratic sweep.

For the banking sector, the latter would see a negative reaction “particularly for bank stocks given the increased potential for stronger regulations and taxes”. A split government for Trump and a Republican sweep, on the other hand, would see a positive reaction from the US banking sector.

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With a blue wave, energy-exposed banks may also be affected as Biden’s $2tn climate plan could result in a long-term demand shock to gasoline demand while capping oil prices. This could also be the case in a split government with Biden as president.

To contact the author of this story with feedback or news, email Bérengère Sim

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