U.S. 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 six lenders that disclosed more than $16.2 billion in share buybacks and $5.4 billion of annualized dividend increases Friday, 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 U.S. 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 nationalized. 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 Friday, 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. Goldman Sachs said it will buy back $5 billion of preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc. during the financial crisis and may raise its dividend or repurchase common stock.
The six banks that raised payouts and approved share buybacks took more than $64 billion in bailout funds during the financial crisis.
The total increase in payments to shareholders announced Friday was calculated by adding the value of the share buybacks plus dividend increases. Dividends were annualized 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 the closing price on March 17.
The figure doesn’t include $7 billion in authorized share buybacks that JPMorgan said it won’t complete before yearend, or Goldman Sachs’s repurchase of Buffett’s stake. Berkshire, which still holds warrants to buy the bank’s stock, has made about $3.7 billion, including paper profits, from the 2008 investment.
The KBW Bank Index of 24 companies advanced 1.1 percent at 4 p.m. in New York. Wells Fargo climbed 1.5 percent to $31.83. New York-based JPMorgan jumped 2.7 percent to $45.74 and Goldman Sachs rose 2.7 percent to $159.96
JPMorgan, the second-largest U.S. 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 authorized the repurchase of 200 million shares, or $6.3 billion based on Friday’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 percent of expected earnings, the Fed said.
“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 U.S. 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 recapitalize.”
The Fed stress test assumed a 28 percent drop in the “Dow Jones Total Stock Market Index” between Dec. 31 and the end of this year — an average quarterly decline of 6.9 percent — followed by a 59 percent rally through Dec. 31, 2013, which amounts to a 7.3 percent advance per three-month period.
That compares with the average quarterly retreat of 15 percent and gain of 7.4 percent 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 Westport, Connecticut-based Birinyi Associates Inc. During the slumps that began in 2000 and 2007, losses averaged 4.8 percent and 10 percent a quarter, they said.
Testing the Test
Banks were also asked what would happen if the jobless rate, now at 8.9 percent, rose as high as 11 percent.
The tests should have been more severe to allow the Fed to identify which specific banks would present big risks to the overall financial system, said Matthew Richardson, a finance professor at New York University’s Stern School of Business.
“You need to know which banks are going to be a problem” in a severe economic slump that also involves tighter market liquidity, Richardson said. “I would have preferred an environment where they put the system through hell again.”
Richardson helped devise a model at NYU with Nobel Prize- winning economist Robert Engle that ranks companies in terms of systemic risk and the volatility of their market capital.
“Systemic risk has increased, not decreased,” said Mark Williams, a former Fed bank examiner who is now an executive-in- residence at Boston University’s School of Management. “It is too early to allow these dividends to go out.”
While not all the banks were cleared to raise dividends, the Fed allowed some to take steps toward repaying the Troubled Asset Relief Program, the $700 billion federal bailout fund.
SunTrust Banks Inc. sold $1.04 billion in common stock and said it will sell $1 billion in debt as the Atlanta-based company seeks to repay $4.85 billion to taxpayers.
KeyCorp, the second-biggest bank in Ohio, said it raised $625 million in stock and will issue debt to help repay $2.5 billion to TARP. A 2-cent increase in the dividend to 3 cents per quarter drew no Fed objection, said KeyCorp, which plans to vote on the payout in May.
“We’re moving away from the micromanagement of major banks by the supervisors and slowly turning it back over to the board of directors,” said Ernest “Ernie” Patrikis, a partner at White & Case and a former general counsel and first vice president for the Federal Reserve Bank of New York, in a phone interview.
U.S. Bancorp, ranked fifth among commercial lenders and based in Minneapolis, raised its quarterly dividend to 12.5 cents a share from 5 cents, and authorized the purchase of 50 million shares through December. BB&T Corp., the ninth-largest U.S. bank by deposits, said it will raise its dividend to 16 cents a share from 15 cents and pay a 1 cent special dividend in the second quarter.
Lenders that didn’t raise their payouts included Bank of America Corp., the biggest U.S. lender, Citigroup Inc. and Capital One Financial Corp., the banking and credit-card company based in McLean, Virginia. Bank of America will reapply to the Federal Reserve for permission to increase its dividend after June 30, the company said. The Charlotte, North Carolina-based company previously said it didn’t expect to raise its dividend until the second half of this year.
Citigroup, the third-largest U.S. bank, said the New York- based company still expects to return capital to shareholders next year. Capital One “continues to believe that its capital and expected capital trajectory are strong,” according to a statement. Regions Financial Corp., the Birmingham, Alabama lender that still owes $3.5 billion in TARP funds, said it hadn’t proposed any immediate capital action to the Fed.
Morgan Stanley, the New York-based securities firm, said it will proceed with plans to buy the portion of the Smith Barney brokerage it doesn’t already own after the Fed’s review.
“The regulators are trying to get back on proper footing in what is a very politicized environment,” said Gary Townsend, president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. The largest banks “are building capital with alacrity and this is another clear signal to the markets that these financial institutions not only have a future but a very profitable one.”
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