10 Banks Likely to Boost Dividends in Q1

NEW YORK ( TheStreet) -- With many large U.S. bank-holding companies in a strong capital position and boosting profits by releasing loan loss reserves, it's only a matter of time before regulators relent and the banks begin to increase dividend payouts and buy back shares.

"If there was anything I was disappointed in third quarter, it was dividends. I was hoping we would have more word on them," said Fred Cannon, an analyst at Keefe, Bruyette & Woods. "Nobody is yet ready to increase their dividends due to regulation."

Richard Bove, an analyst with Rochdale Securities, was was not surprised by the lack of third-quarter dividend announcements. "I really had no expectations. Banks are controlled by bank regulations and they are going to have to get approval to increase their dividends."

The Federal Reserve is supposedly preparing guidelines that would gauge which banks are strong enough to boost dividends or buy back shares. This move, says Bove, is a step in the right direction and could show the Fed's confidence in the financial industry's health. He believes that regulators are likely to let banks increase dividends and he expects that capital requirements won't be as stringent as many expect.

"If you think about QE2, it requires different attitudes. By allowing banks to pay out dividends, banks will be putting money into the economy," said Bove.

Cannon and Bove have given their thoughts on which banks are likely to be the first to increase their dividend payouts. Between the two analysts, the list includes 10 large bank holding companies.

One of the holding companies listed by Bove as likely to increase dividends during the first quarter is M&T Bank Corp. ( MTB) which agreed last week with a deal to acquire Wilmington Trust ( WL) for about $351 million in stock, in a deal expected to close by mid-2011.

M&T owes the government $600 million in bailout money received through the Troubled Assets Relief Program (TARP) and will assume responsibility for the $330 million in TARP money owed by Wilmington Trust.

Since the company's agreement with the U.S. Treasury Department for the TARP money "contains limitations on certain actions of M&T, including the payment of quarterly cash dividends", M&T will need to repay TARP before raising the dividend.

Marty Mosby of Guggenheim Securities said that M&T is "one of the stronger banks, and they are performing well. But given their recent acquisition announcement, and still owing TARP, they would be later in the cycle" in announcing a dividend increase, he said.

10. Comerica

Company Profile

Comerica ( CMA) of Dallas has seen its shares 42% over the past year, closing at $38.82 Monday.

The company was included in TheStreet's list of 10 regional bank targets.

In a report published before third-quarter earnings were released, David Konrad of KBW, included Comerica among several holding companies expected to "more than double their current dividend yields in early 2011," also forecasting that by 2013 the shares will yield "slightly above 5%."

Based on Monday's close a quarterly payout of 5 cents, the shares were yielding 0.52%.

Income Statement

Comerica earned $59 million, or 33 cents a share, during the third quarter, following second-quarter earnings of $69 million, or 39 cents a share, and a net loss to common shareholders of 16 million, or 11 cents a share, in the third quarter of 2009. At that time the company was still paying dividends on $2.25 billion in preferred shares held by the government for TARP assistance. The company fully repaid TARP in March.

The linked-quarter decline in earnings mainly resulted from an $18 million decline in net interest income as new lending volume remained weak.

The company's annualized return on equity for the third quarter -- based on income before extra items -- was 4.04% according to SNL Financial.

Balance Sheet

Comerica had $55 billion in nonperforming assets as of September 30. Nonperforming assets - including nonaccrual loans and repossessed real estate - made up 2.38% of total assets. The holding company's Tier 1 leverage ratio was 10.90% and its total risk-based capital ratio was 14.38%, far exceeding the 5% and 10% required for most banks to be considered well-capitalized by regulators.

The company's Tier 1 common equity ratio was 9.97% as of September 30, already greatly exceeding the 4.5% requirement to be gradually phased-in by January 2013 under Basel III and the ultimate 7% for the largest bank holding companies, which will be fully in-effect in January 2019. This assumes, of course, that U.S. regulators phase-in the requirements of the current Basel III agreement.

Stock Ratios

The shares trade for a low 1.2 times tangible book value according to SNL Financial and 22 times the earnings estimate of $1.76 a share for 2011 among analysts polled by Thomson Reuters. The forward P/E drops to 14 based on the consensus earnings estimate of $2.85 for 2012.

Analyst Ratings

Out of 22 analysts covering Comerica, 10 rate the shares a buy, nine have hold ratings and three analysts recommend investors sell the shares.

9. BB&T Corp.

Company Profile

Share of BB&T Corp. ( BBT) of Winston-Salem, N.C. closed at $25.27 Monday, returning 6% over the previous year.

BB&T's shares currently yield 2.37% on a quarterly dividend of 15 cents a share. While Bove expects BB&T to increase its dividend during the first quarter of 2001, Ross Demmerle of Hilliard Lyons said in a report published after BB&T's third-quarter earnings announcement that his firm "would look to the 3Q11 as a possibility," adding that by then "BB&T's asset quality could be much improved and regulatory authorities may have brought more clarity to what specific capital ratios need to be."

Income Statement

Third-quarter net income available to common shareholders was $210 million, or 30 cents a share, matching the second-quarter earnings results. A year earlier, net income was $152 million, or 23 cents a share.

BB&T reported strong loan growth in all of its non-real estate portfolios and both interest income and noninterest income rose year-over-year. The net interest margin - essentially the difference between a bank's yield on loans and investments and its average cost of funds - was 4.09% during the third quarter, which was a high level among large regional lenders and down slightly from 4.12% the previous quarter but up sharply from 3.68% a year earlier.

The margin benefitted from strong growth in non-interest bearing deposits, which totaled $20.6 billion as of September 30, increasing from $19.8 billion the previous quarter and $18.7 billion a year earlier, and higher yields on loans acquired when BB&T purchased the failed Colonial Bank of Montgomery, Ala. in August 2009.

The provision for loan loss reserves during the third quarter was $770 million, resulting in a "release" of $103 million in loan loss reserves, which followed the trend for the largest U.S. bank holding companies that all saw their third-quarter results driven by earnings releases.

BB&T's third-quarter return on average equity was 5.14% according to SNL.

Balance Sheet

BB&T had $157 billion in total assets as of September 30 and the nonperforming assets ratio was 2.81%, increasing from 2.79% the previous quarter and 2.48% in September 2009. Third-quarter net charge-offs - loan losses less recoveries - totaled $873 rising from $642 million in the second quarter and $446 million in the third quarter of 2009, as BB&T moved marked-down $1.3 billion in nonperformers it moved to held-for-sale.

BB&T's Tier 1 common equity ratio was 9.00% as of September 30, according to SNL Financial.

Stock Ratios

The shares trade for 1.7 times tangible book value according to SNL Financial and at a forward P/E of 14 based on the consensus earnings estimate of $1.76 for 2011, dropping to a forward P/E of 9 based on the earnings estimate of $2.67 for 2012.

Analyst Ratings

Out of 32 analysts covering the company, nine rate BB&T a buy, 21 analysts have hold ratings and two recommend investors sell the shares.

8. Bank of New York Mellon

Company Profile

Shares of Bank of New York Mellon closed at $28.07, returning 6% over the previous year.

The shares currently yield 1.28% based on a quarterly dividend payout of 9 cents. David Konrad expects the company to pay dividends of 54 cents a share during 2011, which would be a dividend yield of 1.92% based on Monday's close.

Income Statement

Bank of New York Mellon reported third-quarter net income to common shareholders of $622 million, or 51 cents a share, compared to $702 million, or 54 cents a share, the previous quarter and a net loss of $2.4 billion, or $2.05 a share in the third quarter of 2009, when the company took $4.8 billion in securities losses.

The company's return on average equity for the third quarter was 7.55% according to SNL Financial.

Balance Sheet

The company had $254 billion in total assets as of September 30. Nonperforming assets were a low 0.16% of total assets. During the third quarter, the company completed its acquisition of PNC Financial's ( PNC) Global Investment Servicing unit and BHF Asset Servicing. Bank of New York Mellon's assets under management increased 18% year over year to $1.14 trillion as of September 30 and assets under custody/administration increased 10% from a year earlier to $24.4 trillion.

Bank of New York Mellon's Tier 1 common equity ratio was 10.70% as of September 30, according to SNL Financial.

Stock Ratios

The shares trade for 3.2 times the tangible book value of $8.59 a share reported by the company. The forward is P/E based on the consensus earnings estimate of $2.54 a share for 2011 is 11, dropping to a forward P/E of 9, based on the consensus estimate of $3.01 a share for 2012.

Analyst Ratings

Out of 21 analysts covering Bank of New York Mellon, 13 have buy ratings, seven recommend investors hold the shares and one analyst recommends investors sell.

7. Northern Trust

Company Profile

Shares of Northern Trust ( NTRS) of Chicago closed at $51.30 Monday, returning 6% over the previous year. Based on a quarterly payout of 28 cents, the shares have a dividend yield of 2.18%. The company was among the group mentioned by Bove as likely to increase its dividend payout in the first quarter of 2011.

Last Friday, HSBC ( HBC) Chairman Michael Geoghegan denied rumors that his company had held merger discussions with Northern Trust.

Income Statement

Third-quarter net income was $155.6 million, or 64 cents a share, declining from $199.6 million, or 82 cents a share the previous quarter and $187.9 million, or 77 cents a share, a year earlier. The company said that earnings for the previous periods had "each benefited from reductions of an indemnification liability related to Visa, Inc.," with expense reductions of $12.7 million in the second quarter and $17.8 million during the third quarter of 2009.

Northern Trust's third-quarter return on average equity was 9.31% according to SNL Financial.

Balance Sheet

Northern Trust had $81 billion in total assets as of September 30, with a nonperforming assets ratio of 0.47%.

CEO Frederick Waddell said the company's "assets under custody increased by 10% to $3.9 trillion and assets under management increased 8% to $657.2 billion," as of September 30.

The company's Tier 1 common equity ratio was 12.70% as of September 30, according to SNL Financial.

Stock Ratios

The shares trade for two times tangible book value according to SNL and 16 times the consensus earnings estimate of $3.25 a share in 2011 among analysts polled by Thomson Reuters. The forward P/E drops to 13 based on the 2012 consensus earnings estimate of $3.98 a share.

Analyst Ratings

Out of 20 analysts covering Northern Trust, seven rate the shares a buy , 12 have hold ratings and one analyst recommends investors sell the shares.

6. M&T Bank Corp.

Company Profile

Shares of M&T Bank Corp. of Buffalo, N.Y. closed at $82.22 Monday, returning 36% over the previous year. Based on a quarterly payout of 70 cents, the shares have a dividend yield of 3.41%, which is the highest current yield for any of the banks listed here.

M&T is the only bank listed here that is still a TARP participant and the company's September 30 Tier 1 common equity ratio was the lowest of the group at 6.42%. In addition to the $600 million in TARP money it owes, M&T will inherit responsibility for Wilmington Trust's $330 million in bailout funds if the companies complete their announced merger, as expected, in the second quarter.

Since M&T is restricted from paying out more than 70 cents a share before repaying TARP, and with banks awaiting word from regulators on new capital requirements, M&T's shareholders may be waiting until later in 2011 for word of a dividend increase.

Income Statement

M&T reported third-quarter net income to common equity of $179.3 million, or $1.48 a share, improving from $176.1 million, or $1.46, a share the previous quarter and $115.1 million, or 97 cents a share, during the third quarter of 2009. The company has remained profitable through the credit crisis.

The third-quarter provision for credit losses was $93 million, increasing from $85 million the previous quarter but declining from $154 million a year earlier. The third-quarter provision kept pace with net loan charge-offs, which also totaled $93 million.

The return on average equity for the third quarter was 9.39% according to SNL.

Balance Sheet

Total assets were $68.2 billion as of September 30 and M&T's nonperforming assets ratio (excluding government-guaranteed nonaccrual loan balances) was 1.84%.

Stock Ratios

The shares trade for 2.6 times tangible book value and at a forward P/E of 14 based on the consensus earnings estimate of $5.99 a share for 2011. The forward P/E drops to 12, based on the consensus earnings estimate of $7.06 a share for 2012.

Analyst Ratings

Out of 18 analysts covering M&T Bank Corp., three recommend buying the shares and the other 15 analysts all recommend investors hold the shares.

5. PNC Financial Services

Company Profile

Shares of PNC Financial Services ( PNC) of Pittsburgh closed at $57.65, returning 9% over the previous year.

On November 4, PNC announced it would sell 7.5 million shares of BlackRock, which David Konrad of KBW said would leave PNC with a 19% stake in the investment manager. As a result, Konrad lowered his 2011 earnings estimate for PNC to $4.90 a share from $4.95 and his 2012 estimate to $5.25 a share from $5.50.

Based on Monday's close and a quarterly payout of 10 cents, PNC has a dividend yield of 0.69% and is among the holding companies Konrad believes are more than likely to at least double their dividends early in 2011.

Income Statement

PNC reported net income to common shareholders of $1.1 billion, or $2.07 a share, for the third quarter, improving from $786 million, or $1.47 a share, in the second quarter and $467 million, or a dollar a share, in the third quarter of 2009.

The earnings improvement was helped by a $128 million release of loan loss reserves, as the provision for credit losses was $486 million, while net loan charge-offs totaled $614 million. The annualized ratio of net charge-offs to average loans for the third quarter was 1.61% and reserves covered 3.48% of total loans as of September 30, supporting the likelihood of significant additional reserve release in the quarters ahead.

The third-quarter net interest margin was 3.96%, compared to 4.35% the previous quarter and 3.76% a year earlier. The decline in the margin from the previous quarter was attributed to weak loan demand and the low interest rate environment.

PNC's return on average equity for the third quarter was 9.70% according to SNL Financial.

Balance Sheet

PNC had $260 billion in total assets as of September 30 and a nonperforming assets ratio of 2.18%. The company's Tier 1 common equity ratio was 9.60% as of September 30, according to SNL.

Stock Ratios

The stock trade for 10 times the consensus earnings estimate of $5.63 a share for 2011, and the forward P/E drops to 9 based on the 2012 earnings consensus of $6.43 a share.

Analyst Ratings

Out of 26 analysts covering the company, 21 rate PNC a buy, while four analysts have hold ratings and one recommends investors sell the shares. Based on a mean price target of $70.79 among analysts polled by Thomson Reuters, the shares have potential upside of 23%.

4. JPMorgan Chase

Company Profile

Shares of JPMorgan Chase closed at $40.51 Monday, down 6% over the previous year. The quarterly dividend payout is currently five cents a share, although the company is among the group that David Konrad thinks is likely to more than double its payout early in 2011.

Eric Schopf, a portfolio manager with Hardesty Capital Management of Baltimore, Md. told TheStreet that his firm considers dividend payouts to be very important. He also said that JPMorgan Chase " by far the best positioned in the capital that they have, the bad loans on the books and the reserves to cover those bad loans," adding that the company is "best-positioned among the big four to emerge and start increasing the dividend."

Income Statement

Net income for the third quarter was $4.4 billion, or $1.01 a share, compared to $4.8 billion, or $1.09 a share during the second quarter and $3.6 billion, or 82 cents a share, during the third quarter of 2009.

The company's loan loss reserves declined by $1.68 billion during the third quarter, declining from a reserve release of $2.35 billion in the second quarter. This was a major factor in the link-quarter earnings decline.

According to SNL Financial, the third-quarter return on average equity was 10.28%.

Balance Sheet

Total assets were $2.1 trillion as of September 30 and nonperforming assets - including nonaccrual loans, restructured loans and repossessed real estate - made up 1.44% of total assets as of September 30, according to SN.

JPMorgan Chase's Tier 1 common equity ratio was 9.50% as of September 30, according to SNL.

The Federal Deposit Insurance Corp.'s proposal on Tuesday to base deposit insurance assessments on total liabilities rather than total domestic deposits will likely cause JPMorgan Chase to consider its funding strategy as this provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act is implemented, since the company had $248.4 billion in foreign deposits as of September 30, according to SNL Financial. That's 28% of the company's total deposits and among U.S. holding companies, only Citigroup ( C) had more foreign deposits, with $548 billion as of September 30.

Stock Ratios

The shares trade for 1.4 times tangible book value and nine times the consensus earnings estimate of $4.62 a share for 2011. The forward P/E drops to 7 based on the 2012 earnings estimate of $5.43.

Analyst Ratings

Out of 24 analysts covering JPMorgan Chase, 21 rate the shares a buy, while the other three analysts recommend investors hold the shares. Based on the median price target of $52.57 among analysts polled by Thomson Reuters, the shares have 30% upside potential.

3. Wells Fargo

Company Profile

Shares of Wells Fargo & Co. ( WFC) of San Francisco closed at $29.04 Monday, returning 8% over the previous year. The company's quarterly dividend payout is five cents share, and KBW's David Konrad has forecasted the shares will yield above 4% in 2013.

Income Statement

Net income applicable to common stock for the third quarter was $3.2 billion, or 60 cents a share, increasing from $2.9 billion, or 55 cents a share the previous quarter, and $2.6 billion, or 56 cents a share, a year earlier.

The company said that earnings were boosted by a $650 million release in loan loss reserves, but that there was a "$380 million approximate negative impact from changes to Regulation E and related overdraft policy changes," as the company adopted the customer "opt-in" requirement for overdraft coverage on ATM and debit card transactions.

Wells Fargo's return on average equity for the third quarter was 11.05% according to SNL Financial.

Balance Sheet

Total assets were $1.2 trillion as of September 30 and nonperforming assets - including nonaccrual loans and repossessed assets - made up 2.83% of total assets.

Wells Fargo's Tier 1 common equity ratio was 8.01% as of September 30, according to SNL.

Stock Ratios

The shares trade for 10 times the consensus earnings estimate of $2.82 a share for 2011 and just 8 times the consensus estimate of $3.60 a share for 2012.

Analyst Ratings

Out of 25 analysts covering Wells Fargo, 18 rate the shares a buy, four analysts have hold ratings and three recommend investors sell the shares. Based on the mean price target of $35.47 among analysts polled by Thomson Reuters, the shares have 22% upside potential.

Marty Mosby of Guggenheim Securities has a buy rating on the shares with a $39 price target, saying the company's "low valuations are unsustainable," adding that "mortgage revenue is going to improve since refinance activity has picked up and there is earnings momentum from the consolidation with Wachovia, which continues to generate returns."

2. U.S. Bancorp

Company Profile

Shares of U.S. Bancorp ( USB) of Minneapolis closed at $25.70 Monday, returning 9% over the previous year. The current quarterly dividend payout is five cents a share and Konrad believes the company is likely to more than double its payout early in 2011, with the dividend yield exceeding 3% in 2012.

Income Statement

Third-quarter net income to common shareholders was $871 million, or 45 cents a share, increasing from $862 million, also 45 cents a share, the previous quarter and $583 million, or 30 cents a share, during the third quarter of 2009. Following the earnings trend for the largest banks, the big driver of earnings improvement was a reduced provision for credit losses of $995 million during the third quarter, compared to $1.1 billion the previous quarter and $1.5 billion a year earlier. But counter to the trend, U.S. Bancorp didn't release loan loss reserves during the third quarter, as its net loan charge-offs were also $995 million.

The company's return on average equity for the third quarter was 12.05% according to SNL Financial.

Balance Sheet

Total assets were $291 billion as of September 30, and the company reported nonperforming assets of $3.56 billion, or 1.23% of total assets.

U.S. Bancorp's Tier 1 common equity ratio was 7.60% as of September 30, according to SNL.

Stock Ratios

The shares trade for 2.9 times tangible book value according to SNL and 12 times the consensus earnings estimate of $2.15 a share for 2011. The forward P/E drops to 10 based on the consensus earnings estimate of $2.65 a share for 2012.

Analyst Ratings

Out of 26 analysts covering U.S. Bancorp, 17 rate the shares a buy, seven recommend investors hold the shares and two analysts recommend selling the shares.

1. State Street

Company Profile

Shares of State Street ( STT) of Boston closed at $44.75 Monday, returning 8% over the previous year. The company is currently paying a dividend of a penny a share, and with the best return on equity among this group of holding companies and a very strong capital position, State Street appears very likely to increase its dividend payout soon, and by a significant amount.

Income Statement

State Street reported $540 million in net income available to common shareholders for the third quarter, or $1.08 a share, increasing from $427 million, or 87 cents a share, the previous quarter and $327 million, or 66 cents a share, a year earlier. CEO Joseph Hooley said the operating improvement was "driven by strength in our servicing fee revenue, and our ability to maintain our focus on cost control," adding that "during the third quarter, we won $477 billion in assets to be serviced."

State Street's return on average equity for the third quarter was 12.95%.

Balance Sheet

State Street had $173 billion in total assets as of September 30, and minimal loan exposure, as it focuses on providing fee-based services to institutional investors.

The company's Tier 1 common equity ratio was 13.90% as of September 30, according to SNL Financial. This is the highest Tier 1 common equity ratio for any of the banks listed here.

Stock Ratios

The shares trade for 2.4 times tangible book value according to SNL Financial, and 12 times the consensus earnings estimate of $3.71 a share for 2011. The forward P/E is 10, based on the consensus 2012 earnings estimate of $4.30 a share.

Analyst Ratings

Out of 18 analysts covering State Street, 14 rate the shares a buy, while the other four analysts recommend investors hold the shares.

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-- Written by Philip van Doorn in Jupiter, Fla. and Maria Woehr in New York

To contact Philip van Doorn, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

To contact Maria Woehr, click here: Maria Woehr.

To follow the writer on Twitter, go to http://twitter.com/newsgirlmw.

To submit a news tip, send an email to: tips@thestreet.com.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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