Big Banks' Dividend Dilemma
NEW YORK (
) -- Every time big banks appear to be close to raising their paltry dividends, another crisis erupts to thwart those plans.
As a result, investors who had been betting on a dividend resurgence in 2010 appear to have missed the mark.
"It's not something that's going to happen overnight," says Brett Barragate, who consults with big banks about capital issues as a partner at the law firm Jones Day. "This is a one-year to two-year process. It's a slow-moving train."
Barragate is referring to banks' need to adjust to stricter capital and liquidity requirements. Despite bullish statements from bank executives -- and indications last week that the
Federal Reserve
could soon give them the green light -- Barragate doesn't expect even the healthiest banks to boost dividends til mid-2011, at the earliest.
Part of the problem is regulatory, while part of it is related to the global markets and economy, which are still in flux.
Some new rules on capital standards have been sketched out by regulators at home, via the Dodd-Frank financial reform bill. Others have been sketched out by regulators abroad, via Basel III. But none of the rules are final, and it's unclear how they'll be integrated into a cohesive set of standards. Those standards will apply not just to how much capital banks must hold against bad assets and market stress, but how different types of capital components are ranked and different types of activity and assets are weighted, according to riskiness.
Because of the complexity of those negotiations -- and the schizophrenic nature of the financial markets since the crisis erupted -- the prospects for dividend hikes have swayed dramatically over the past year.
Those prospects appeared glorious from late-2009 until April, when a trifecta of worry about European debt, financial reform and Basel III came into play. Those concerns started to ease in early fall, once the EU bailout, financial regulation and Basel III had passed. By earnings season, once again, the dividend chorus had grown raucous.
Bank executives responded in kind. Management of top U.S. banks indicated they were prepared to start returning extra cash to aggrieved shareholders as soon as regulators gave them a thumbs-up.
JPMorgan Chase
(JPM) - Get Report
CEO Jamie Dimon indicated his bank could restore its dividend by the first quarter of 2011.
Bank of America
(BAC) - Get Report
CEO Brian Moynihan said that a "reasonable dividend policy" was "embedded" in forward-looking capital assumptions. He predicted that his bank would restore a meaningful payout over the next couple of years.
Wells Fargo
(WFC) - Get Report
executives
appeared similarly eager to restore pre-crisis dividends as soon as possible. CEO John Stumpf indicated that regulatory uncertainty was the main hurdle to accomplishing that goal.
In less than a month's time that enthusiasm had dimmed noticeably. The eruption of mortgage scandals as well as the second phase of the European debt crisis -- related this time to Ireland, instead of Greece -- have rendered capital-adequacy assumptions questionable at best.
At a conference last week, JPMorgan CFO Doug Braunstein vaguely mentioned dividends but was much more careful in his phrasing than Dimon had been on Oct. 13. Braunstein said management might soon use excess capital for dividends or it might just "deploy it in a way that we think adds incremental value over a long period of time."
Moynihan went as far as to say that adding a layer of safety and soundness to the balance sheet was just about as good as boosting dividends.
"Low-risk equity remains on the bank's balance sheet to meet the Basel requirements," said Moynihan. "This doesn't mean the equity is worthless. It is just being carried in a different form. Rather than return to you as dividends or share buybacks, it is going to be sitting on the balance sheet in our tangible book value per share."
Ouch.
Even the
Fed's
long-awaited announcement regarding dividends last week led to dreary headlines. Investors focused on the fact that the Fed would require another "stress test" before allowing dividend hikes, rather than the fact that the Fed might allow well-capitalized banks to do so as soon as January.
The market also seemed to be ignoring the fact that the stress-testing requirement itself was old news: The Dodd-Frank bill passed in July already required annual stress tests for large financial firms.
Barragate indicates that uncertainty surrounding the stress tests' parameters and its results may be causing some concern. Unlike tests performed by the Fed in the spring of 2009, these results won't be made public.
"They could have been including the potential for banks to pay dividends in a more stressful environment; they could have been stress-testing exposure to European banks, given what's going on," he explains. "We don't really know."
But Barragate also points out that the high-profile stress tests conducted in 2009 were meant to show investors which banks would need more capital to survive. By contrast, these tests will identify which banks can start returning capital to shareholders as soon as possible. Those that "fail" aren't necessarily bad banks; they just lag competitors in the race to lure investor interest.
"This second round is for a different reason," he says. "It's driven by the desire of a lot of banks to restart dividends or stock repurchases, which would be very good for investors. If I'm an investor, I would watch out for that in particular, it's a very promising sign."
Healthy dividends widen the playing field for bank stocks by attracting a whole new class of investors. Many pension funds and mutual funds have a minimum dividend requirement while investors reliant upon fixed income need dividend cash flow. Others who have become wary of stock market volatility simply want dividends for peace of mind.
More investors leads to more liquidity, more stable performance and usually higher market valuation. To say that banks are eager to boost payouts is an understatement.
The largest U.S. banks are due to provide detailed capital plans and the
results of a rough-and-tumble stress test to the Fed by Friday, Jan. 7. The banks required to provide the information are the 19 "SCAP" banks which went through the stress-test rigmarole last year: Bank of America, JPMorgan, Wells,
Citigroup
(C) - Get Report
,
Goldman Sachs
(GS) - Get Report
,
Morgan Stanley
(MS) - Get Report
,
U.S. Bancorp
(USB) - Get Report
,
Bank of New York Mellon
(BK) - Get Report
,
State Street
(STT) - Get Report
,
Ally Financial
,
Capital One
(COF) - Get Report
,
PNC
(PNC) - Get Report
,
American Express
(AXP) - Get Report
,
KeyCorp
(KEY) - Get Report
,
Fifth Third
(FITB) - Get Report
,
SunTrust
(STI) - Get Report
,
BB&T
(BBT) - Get Report
,
Regions
(RF) - Get Report
and
MetLife
(MET) - Get Report
.
Of those banks, none has lifted dividend payouts since the fall of 2008; just three have kept dividends stable: Goldman, AmEx and MetLife. The 15 remaining publicly traded firms have cut dividends by an average of 39 cents per quarter.
The biggest dividend cut came from SunTrust, which boosted its dividend to 77 cents per quarter in early 2008, but now offers just a penny per share. Of those that cut dividends, six pay that nominal quarterly rate: SunTrust, BofA, State Street, KeyCorp, Fifth Third and Regions. (Citi cut dividends entirely.) Another five -- JPMorgan, Wells, Morgan Stanley, U.S. Bancorp and Capital One -- pay a nickel per share.
BoNY Mellon offers 9 cents each quarter; PNC offers 10 cents each quarter, and BB&T offers 15 cents. Those levels are better than competitors, but just a fraction of their pre-crisis levels of 24 cents, 66 cents and 47 cents, respectively.
While banks aren't required to make their stress-test results public, those that pass with flying colors may do just that -- thereby urging less well-capitalized competitors to do the same. Investors should be ready to hear more solid news about the dividend outlook when banks report earnings in mid-to-late January. Then, finally, the market can sort out the "have enough capitals" from the "have nots."
Barragate warns, though, that even the healthiest banks may not be able to raise dividends immediately.
"I get the sense that banks have an increasing level of comfort with their capital levels, but I would be very surprised if the result of these stress tests or the requests by these banks to raise dividends came that quick," said Barragate. "You probably can't have too much capital. You may be comfortable with what you have, but I don't think anyone's going to feel like they have too much."
-- Written by Lauren Tara LaCapra in New York
.
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