The large banks suspended dividends during the financial crisis, stemming cash outflows and shoring up their financial positions. Now that it seems the worst has passed, the banks are eager to declare dividends once again and hopefully appease their investors. As such, most of the 19 large bank holding companies that will submit their capital plans to the Federal Reserve in early 2011 appear set to gain approval to begin returning capital to investors by increasing their dividends or buying back shares.
There are a few of the smaller banks that still have TARP funds outstanding, and teh regulators have made it clear that any banks still owing the government money will have to repay in full before offering dividend payouts. Issuing a dividend, a distribution of retained earnings, is a staple to many stock valuation models. When the dividends disappeared, so too did many stock prices. Stocks trading today at deep discounts, some even below their book value which would perplex a Graham and Dodd-er are likely to run up when dividends are declared once again. The Fed will also expect the holding companies to “demonstrate with great assurance that they could achieve the ratios required by the Basel III framework.” While U.S. regulators are still in the process of adopting Basel III, third-quarter capital ratios can provide a hint of which holding companies are best-positioned right now to comply.
SNL Financial has indicated that banks expected to overcome the Fed’s hurdle and gain approval include Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), Capital One Financial (NYSE: COF), MetLife (NYSE: MET), American Express (NYSE: AXP), and U.S. Bancorp (NYSE: USB) among others. Out of this group, all had Tier 1 risk-based common equity ratios of at least 7.56% (for USB), ranging as high as 13.90% for State Street. Additionally, these banks were all profitable during the third quarter, except for Bank of America, which posted a net loss of $7.3 billion, or 77 cents a share, although that resulted from a non-cash goodwill impairment charge of $10.4 billion, applicable to its Global Card Services segment. In a letter to member banks and holding companies under its supervision, the Federal Reserve reminded the industry that it would continue its active monitoring of banks’ capital levels and risks to capital, and said bank holding companies “should eliminate, defer, or significantly reduce” dividend payouts if net income over the previous four quarters is insufficient to “fully fund the dividends.”
