Dividend Cuts On the Way for Banks

This column originally posted on RealMoney.com on Jan. 13. For more information about subscribing to RealMoney, please click here.

More bank holding companies are likely to cut their dividends in the near future, as even some large banks that remained profitable during the first three quarters of 2008 paid out more than they earned.

On Monday, Morgan Keegan Analyst Robert Patten lowered fourth-quarter earnings estimates for 14 regional banks and, based on the reduced estimates, predicted that SunTrust (STI), Synovus Financial (SNV) and Marshall & Ilsley (MI) would cut their payouts to investors "in the next few months or when they report [fourth-quarter] earnings." SunTrust and Synovus were among several Georgia banks that recently increased their provisions against expected loan losses.

Even for these and other companies receiving money through the federal government's $700 billion Troubled Assets Relief Program, raising and/or preserving capital remains a primary concern right now, especially when you consider that TARP capital is really money borrowed from the federal government. While the initial dividend rate on preferred shares issued to the Treasury is 5%, that rate will bump to 9% after five years, making the eventual cost of this capital rather high.

One way to predict which companies might have further cuts in store is to take a look at dividend payout ratios, which is the dividends paid out to investors divided by income before extraordinary items. We have limited our sample to bank holding companies with over $10 billion in total assets with positive year-to-date net income as of September. Thrift holding companies are not included.

Profitable Large Publicly-Traded Bank Holding Companies with Highest Payout Ratios Highline Financial, Inc.

Some of these companies have already reduced or suspended dividends.

Fifth Third

Fifth Third Bancorp (FITB) has the top dividend payout ratio on our list. The Cincinnati-based company managed a slight year-to-date profit, despite a net loss of $202 million in the second quarter and a loss of $56 million for the third quarter. It cut its quarterly dividend to a penny per common share on Dec. 16, after cutting it to 15 cents in the second quarter from 44 cents in the first quarter.