As earnings season proceeds in earnest, all of the big banks have reported in, and hope to receive regulatory approval to increase their dividends. That list includes Charlotte-based Bank of America (BAC).
However, the biggest U.S. bank by assets may find it tough to sell regulators, and Wall Street, on the near-term prospects.
Still, you can’t blame CEO Brian Moynihan for giving it his best shot. Despite reporting a $1.2 billion loss in the fourth quarter of 2010, Moynihan went about making his case for why Bank of American could soon get regulatory clearance to increase its dividend.
The dividend has been stuck at a penny/quarter since the onset of the financial crisis in 2008.
Despite his optimistic projection, the odds are against regulatory approval for a dividend increase. Consider:
• In addition to posting a fourth-quarter loss, Bank of America is expected to spend billions of dollars to rid its balance sheet of the subprime swap surrounding its home loans business, most of which used to be known as Countrywide.
• Unlike J.P. Morgan Chase (JPM), which is widely expected to be among the first banks to raise its dividend from crisis levels, Bank of America still faces questions about its financial strength. To that end, the watchdogs can’t be overlooking the many questions about how much the bank might have to spend to buy back souring mortgages from investors.
• Options markets are implying there is next to no chance Bank of America will be cleared to increase its dividend payments in 2011, judging by the relative prices of put and call options on Bank of America stock. Contrast that with a recent report by strategist Vadim Zlotnikov at AllianceBernstein that states options markets are priced for full-year dividend payouts to rise 178% at JPMorgan, 110% at Wells Fargo (WFC) and 251% at State Street (STT).
All of this makes Moynihan’s comments on the dividend seem out of touch. Bank regulators must approve any dividend increase by the big banks that are undergoing stress tests, and they surely haven’t forgotten that Bank of America nearly toppled once before.
The bank took some modest steps Friday to answering some of those questions. Moynihan said the bank expects to exceed capital guidelines as they are phased in, and executives for the first time estimated the costs Bank of America could face in settling so-called private label mortgage repurchase claims.
Stressing that this is only a guess, Bank of America said it believes its exposure to these so-called private label putback claims could cost shareholders $7 billion to $10 billion before taxes.
Those numbers were met with some skepticism even among Bank of America’s fans on Wall Street, where high-end estimates have been running to $15 billion and above.
Management “commented on $7-10 bil range for private label issue vs. our $13 bil est., but we believe the stock is implying significantly higher,” Citigroup analyst Keith Horowitz wrote in a note to clients.
