Wells Fargo and Citigroup may join banks in unleashing more than $9 billion in dividend increases and share buybacks if these get passing grades this week on the Federal Reserve’s annual stress test.
Thirteen of the 19 largest US lenders may say these would pay out $3.79 billion in extra dividends this year and buy $5.52 billion of additional shares, according to estimates of six analysts compiled by Bloomberg. That’s 30 per cent more than these spent last year. San Francisco-based Wells Fargo would probably offer the biggest difference at a combined $4.16 billion, followed by Citigroup with $2.92 billion.
Wells Fargo is expected to pay $3.91 billion in dividends, based on an increase to 75 cents a share from the current 48 cents, estimates show.
“This is their opportunity to differentiate themselves from their peers and competitors, and argue for a fresh look from investors,” said Matt McCormick, who helps oversee $5.1 billion at Bahl & Gaynor Inc in Cincinnati and focuses on dividend-paying stocks. “You’ll see a lot of people saying the banks are out of the woods.”
Investors are pressing lenders to restore dividends and buybacks to levels that prevailed before the financial crisis, when they were all but eliminated under terms of US bailouts. Dividends contributed about two-thirds of the total return for stockholders during the decade before the 2008 crisis, as measured by the KBW Bank Index.
The 24-company benchmark now yields 1.8 per cent, about half the average in 2007. The index rallied 16 per cent this year, partly in anticipation that banks will get permission to increase payouts after getting results of the stress tests. which are due March 15. The Fed imposed the tests on 31 US firms with at least $50 billion in assets to ensure lenders can withstand another crisis. The most dire scenarios call for unemployment to hit 13 per cent and a 20 per cent slump in home prices.
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Still debating
There’s still doubt on whether all the requests would be approved and investors would get the full amount analysts are predicting. As of last week, the Fed was pushing back against some banks after concluding these underestimated potential losses on consumer debt in a severe economic slump, according to two people with knowledge of the situation. Examiners are still fine-tuning calculations, which may change, the people said.
Wells Fargo, the most valuable US lender, will offer $1.39 billion in added dividends this year and another $2.77 billion through share repurchases, for a combined increase of 84 per cent, the estimates show. That would boost the annual payout to 75 cents a share from 48 cents. The buybacks equal about 1.7 per cent of the 5.27 billion shares outstanding based on last week’s closing price.
Citigroup, the third-largest US lender by assets, could distribute $744 million in higher dividends based on an increase to 28 cents this year from 3 cents, the estimates show. The New York-based firm may also buy about $2.18 billion in shares, equal to 2.2 per cent of the total. The bank didn’t repurchase shares in 2011.
Citigroup would raise its payout, analysts estimate, even though it’s restricted from boosting it as long as the US government holds a remaining $3.03 billion in trust-preferred securities issued as part of emergency funding programs. The restrictions can be waived, according to company filings.
Goldman Sachs Group’s annual payout may fall 28 per cent to $4.9 billion, according to the consensus. The New York-based investment bank may increase the annual dividend to $1.47 a share from the current $1.40, and repurchase $4.17 billion in shares, or about 7 percent of the 495 million shares outstanding. Total dividends and buybacks probably will be down from last year when the company had more shares outstanding.
Mary Eshet, a Wells Fargo spokeswoman, declined to comment on the projected dividends and buybacks, as did Michael DuVally of Goldman Sachs and Citigroup’s Shannon Bell.
The dividend and buyback estimates were compiled from reports written by analysts at International Strategy & Investment Group Inc, Raymond James Financial Inc., Portales Partners LLC, Morgan Stanley, Barclays Capital, and Oppenheimer & Co.
In most cases, the dividend estimates are based on the current dividend rate prevailing in the first quarter, plus three quarters of the higher payout.
Dividends historically have been sought by income-oriented investors, and banks traditionally have been among the highest payers. The yield for the 81-company Standard & Poor’s 500 Financials Index exceeded the broader S&P 500 every year from 1998 through 2007, according to data compiled by Bloomberg.
Even with dividends, total return for the S&P Financials was a negative 30 percent over the past decade, compared with a 44 percent gain for the S&P 500. As bank payouts increase, their shares may be sought by a wider swath of buyers, said Jason Goldberg, a senior bank analyst at Barclays Capital in New York.
Yield Shortage
“There is a search for yield, and to the extent bank dividend yields increase, that makes them attractive to equity- income investors,” Goldberg said in a phone interview last week. “The industry is on much firmer ground.”
The Fed has said it will watch payouts closely. Regulators limited banks to returning 60 percent of their retained earnings to shareholders in 2011, split evenly between dividends and share repurchases. Regulators will pay “particularly close scrutiny” this year to banks asking permission for dividend payouts of more than 30 percent in after-tax profit, the Fed said in instructions it published in November.
The dividend for JPMorgan Chase & Co. (JPM), estimated to pay out the most among the banks, would be 25 percent of 2012 earnings as estimated by 23 analysts in a Bloomberg survey, while Wells Fargo’s would be about 23 percent.
Payout Forecast
Wells Fargo’s quarterly dividend may increase to 20 cents in the second quarter, according to the Bloomberg Dividend Forecast. Citigroup’s will climb to 5 cents and Goldman Sachs’s will stay at 35 cents. The forecast is compiled using variables that include company guidance, analysts’ predictions and trends. It had a global accuracy rate of 83.7 percent last year, compared with 71.4 percent accuracy by analysts.
Some banks won’t announce any increase. Bank of America Corp. (BAC), struggling from shoddy mortgage loans that have cost about $40 billion, didn’t ask to raise its dividend or buy back stock in its capital request to the Fed, Chief Executive Officer Brian T. Moynihan said during a March 8 investor conference. The Charlotte, North Carolina-based lender, ranked second by assets after JPMorgan, pays a 1-cent quarterly dividend. The total payout will nevertheless rise by about $16 million, or 4 percent, because more shares are outstanding.
Regions Financial Corp. (RF) is focused on repaying the $3.5 billion in U.S. bailout funds it still owes, finance chief David Turner said in January. The amount is the largest outstanding for any public commercial bank under the U.S. Treasury Department’s Troubled Asset Relief Program. Regions, based in Birmingham, Alabama, hasn’t reported an annual profit since 2007.
Buffer Zone
Regulators are allowing the largest U.S. banks to disburse capital -- the buffer between a bank’s assets and liabilities that helps shield depositors from losses -- as long as it remains above 5 percent of assets under the stressed scenario. U.S. commercial banks with at least $10 billion in assets finished 2011 with a core capital ratio of 8.77 percent, according to the Federal Deposit Insurance Corp. Loan losses fell to $25.4 billion in the fourth quarter, the lowest in 15 quarters, the FDIC said.
In addition to approving or rejecting banks’ capital plans, regulators could release bank-specific estimates of revenue, losses and capital ratios under the adverse scenario. These disclosures, perhaps more than the payout announcements, may be the “most surprising,” Charles Peabody, an analyst at Portales, wrote in a March 1 note.
Gap in Estimates
During the stress tests, the Fed has generally predicted banks would suffer greater losses on credit cards and mortgage- related holdings than what firms estimated in the plans they submitted in January, said the people familiar with the process, who asked not to be identified because the results aren’t public.
Still, investors such as McCormick and Tom Mangan, who helps oversee $3 billion at James Investment Research Inc. in Xenia, Ohio, said they don’t expect the Fed to single out or reject the capital plans of individual banks.
“Regulators can’t kick the legs out of the financial industry at this point,” said Mangan, whose firm holds shares of Capital One Financial Corp. (COF), Keycorp and PNC Financial Services Group Inc. (PNC) “It’s not their pattern to nail a bank because then you create a run and the stock market drops overall and you get angry voters.”