June 12 (Bloomberg) -- Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. financial firms that slashed dividends this year, a tally that exceeds the previous five years combined. Goldman Sachs Group Inc. and Bank of America Corp. may follow as mortgage-related losses escalate, analysts say.

Banks are trying to hang onto capital as the U.S. home market implodes and loan losses soar. KeyCorp, Ohio's third- largest bank, chopped its payout in half today -- the first decrease in 43 years -- and said it must raise $1.5 billion after losing a tax case. The world's biggest financial companies have raised $293.8 billion to bolster their balance sheets.

``They need the cash on hand,'' said Bartley Barnett, head of equity trading at Morgan Keegan Inc. in Memphis, in an interview yesterday. ``If that's the case or not, that's the perception.''

The cuts contrast with 2002 to 2007, when a total of a dozen financial companies in the Standard & Poor's 500 Index reduced or erased their payouts, according to data compiled by Howard Silverblatt, S&P's senior index analyst. Among those reducing payouts so far this year are Washington Mutual Inc. and Sovereign Bancorp Inc., the two biggest U.S. savings and loans, and National City Corp., Ohio's biggest bank.

The situation is starker when more banks are included. Of the 580 publicly traded banks in the American Stock Exchange, New York Stock Exchange and Nasdaq Stock Market, 49 have cut or eliminated their dividends this year, data from KBW Inc. analyst Melissa Roberts show. In 2007, only eight banks lowered or cut their payouts.

All or None

Goldman and Bank of America are poised to announce ``dramatic'' dividend cuts, Deutsche Bank AG strategists Scott Weiner and Chris Hauck wrote in a June 10 report. Goldman, the world's biggest securities firm, may reduce its dividend by 26 cents to 9 cents, while Bank of America, the second-largest U.S. bank by assets, may cut its payout by the same amount, to 38 cents, the analysts said.

Citigroup, the biggest U.S. bank, may lower its dividend by 23 cents, the same amount it did in January, to 9 cents, according to the report, which relied on an analysis of options trading and prices.

Lenders are reluctant to cut payouts entirely, even as capital dwindles, to cater to shareholders who require a dividend to stay invested, said Brad Evans, co-manager of the $404 million Heartland Value Plus Fund. ``A bank would be fairly hesitant to fire their shareholders,'' he said.

Washington Mutual and National City each slashed their dividends to close to the bare minimum -- a penny.

`First Line of Defense'

Cutting dividends is a ``first line of defense to restore capital levels,'' Evans said. ``With their stocks down, raising equity is massively dilutive to shareholders.''

Some financial firms have done both. KeyCorp reduced its dividend by 50 percent to 75 cents a share annually so it can save $200 million a year. Based on its previous dividend, it yielded 12.5 percent, more than five times the average stock in the S&P 500. The Cleveland-based bank lost a tax case tied to accounting for leases that will trigger a charge of $1.1 billion to $1.2 billion.

KeyCorp ``must recognize the current economic realities as we manage our business for the future,'' Chief Executive Officer Henry Meyer said in a statement.

Sovereign Bancorp posted a $1.3 billion loss for 2007 and eliminated its quarterly dividend in January. The lender raised a net $1.39 billion in capital selling shares and fixed-rate notes to act as a cushion should the economy keep slowing.

Washington Mutual's dividend cut, in April, came as the company said it would raise $7 billion from private investors led by TPG Inc. National City also raised $7 billion.

Payout Doubt

Financial companies that haven't cut dividends end up offering more in yields as their stock price falls. These days, banking stocks have dropped so far that yields outpace the S&P 500 Index average of 2.29 percent. The average yield on the S&P 500 Financials Index is 4.36 percent.

Bank of America pays a $2.56 annual dividend, representing a yield of 8.7 percent as of today's close. The stock's 29 percent decline this year suggests skepticism among investors that the payout will be sustained. The lender said yesterday it may consider a dividend cut if the economy weakens.

Wachovia dropped 31 percent after the bank cut its dividend in April. SunTrust Banks Inc., which hasn't reduced its payout, fell 30 percent this year. The yield was 7 percent as of today.

Citigroup cut its dividend 41 percent in January, the first reduction since the company's creation in a 1998 merger. The move allowed the bank to hold onto an additional $4.4 billion in capital each year. Citigroup recorded $42.9 billion in losses on real estate and was forced to raise $44.1 billion in fresh capital.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: June 12, 2008 17:18 EDT