US bank investors may be rewarded with an extra $22 billion annually, after government tests showed the industry has regained enough strength to boost dividends and share buybacks.
JPMorgan Chase & Co, Wells Fargo & Co and Goldman Sachs Group Inc were among the six lenders that disclosed more than $16.2 billion in share buybacks and $5.4 billion of annualised dividend increases yesterday, according to data compiled by Bloomberg. The banks made their announcements after learning they passed a Federal Reserve review of their financial health.
“This is a real signal by the Federal Reserve to tell the world that the US banking system is back,” said Gerard Cassidy, an analyst at RBC Capital Markets. “We are going to see, in our view, over the next three years, a dramatic increase in the dividends.”
Regulators are allowing banks to begin restoring dividends that were cut in early 2009 during the financial crisis, when investors and analysts were speculating some banks might need to be nationalised. Losses tied to home mortgages, commercial real estate and business lending drained capital, leading to more than 300 failures.
The Fed had demanded 19 of the biggest lenders undergo stress tests before they could consider actions that would reward shareholders by dipping into capital. The process was formally completed yesterday, and within hours, banks began announcing their plans.
JPMorgan said it may repurchase $15 billion in shares and boosted the payout rate to a level equal to $3 billion in additional annual payments, while Wells Fargo said shareholders could receive as much as $7.7 billion.
The six banks that raised payouts and approved share buybacks took more than $64 billion in bailout funds during the financial crisis.
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The total increase in payments to shareholders announced yesterday was calculated by adding the value of the share buybacks plus dividend increases. Dividends were annualised over four quarters and multiplied by the number of outstanding shares, which were reduced to account for the total stock buybacks. The value of the shares repurchased was pegged to Thursday’s closing price.
JPMorgan, the second-largest US bank by assets, raised its quarterly payout to 25 cents a share from 5 cents and said $8 billion in shares may be repurchased in 2011. San Francisco- based Wells Fargo authorised the repurchase of 200 million shares, or $6.3 billion based on yesterday’s closing share price, and a special dividend of 7 cents a share, which will raise the first-quarter payout to 12 cents.
The Fed told banks in November to consider conservative payouts that would still allow for a significant build-up of capital. Firms are “generally expected” to limit 2011 dividends to 30 per cent of expected earnings, the Fed said yesterday.
Still fragile
“The very cautious approach speaks to the tightrope which the Fed knows it is walking on,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington, whose clients include the largest US banks. The banking system remains fragile and lenders still need capital to meet new international standards, she said. “But if they don’t start paying dividends, they will never attract investors and they will never recapitalise.”
The Fed stress test assumed a 28 per cent drop in the “Dow Jones Total Stock Market Index” between December 31 and the end of this year — an average quarterly decline of 6.9 per cent -- followed by a 59 per cent rally through December 31, 2013, which amounts to a 7.3 per cent advance per three-month period. That compares with the average quarterly retreat of 15 per cent and gain of 7.4 per cent by the Standard & Poor’s 500 Index during bear and bull markets, respectively, since 1962, according to data compiled by Kevin Pleines and Cleveland Rueckert, analysts at Birinyi Associates.