The money is rolling in from West Asia and Far East—but not quite rapidly enough to fill the holes in Western bank balance sheets. Isn’t it time for Wall Street’s limping titans—Merrill Lynch and Co. Inc, Citigroup and Morgan Stanley—to follow UBS and scrap their dividends?
The latest to go cap in hand to Asia is Merrill. It is reportedly close to getting a $5 billion (Rs19,800 crore) capital injection from Singapore’s Temasek Holdings Pte. That certainly will be a useful step toward shoring up its capital base. But the investment bank has already taken a $8.4 billion write-down. The new boss, John Thain, is expected to take another $8 billion or so hit. If so, Temasek’s cash would only fill roughly 30% of the gap. Nixing the pay-out to shareholders, $1.2 billion over the last year, would nudge Merrill’s capital further in the right direction.
It’s a similar story with the other banks which have come a cropper as a result of this year’s credit crunch. Citi would save the most. It spent $10.7 billion on dividends in the past year.
So far only UBS has both tapped Eastern funds for cash—raising $11.5 billion from Singapore’s GIC and a mystery investor, thought to be from Saudi Arabia—and dispensed with its cash dividend, worth $4.2 billion in the last 12 months. The total savings from these two moves will be $15.7 billion—more than filling the $14 billion hole left by its write-downs.
Of course, banks do not like to abandon their dividends. This normally goes down badly with shareholders. But the main alternatives—selling assets at knock-down prices or raising capital on expensive terms—aren’t attractive either.
There is, of course, another option. The banks could operate with depleted capital bases but slam on their lending brakes. It’s not clear that this would be in shareholders’ interests as their banks would be ceding market share to better capitalized rivals.