By Ronald D. Orol
WASHINGTON (MarketWatch)--Nineteen big banks that underwent
government stress tests in 2009 must submit new capital plans to
the Federal Reserve by Friday if they want to be eligible to hike
their dividends or repurchase stock.
The Fed, after an expected close to three month-long review of
these plans, is likely to permit a large group of these financial
institutions to raise their dividends, analysts say.
"This stress test is going to provide the Fed the political
cover to say it's OK for some banks to issue dividends. The Fed
will allow the stronger banks such as Morgan Stanley (MS) and Wells
Fargo & Co. (WFC) to issue new dividends," said Nancy Bush,
financial industry consultant at NAB Research.
"There may be some in the next tier down where you have had
progress on earnings but they are not back to a normal earnings
environment where the Fed will want to have a second look before
approving dividend hikes."
Jaret Seiberg, analyst at MF Global Inc., said he expects most
healthy banks will boost dividends by the end of the second
quarter.
All of this is raising competitive concerns with those financial
institutions worried they won't be permitted to raise
dividends.
"It may have a greater impact than just the dividend issue,"
said Dwight Smith, partner at Alston & Bird LLC, in Washington.
"Some banks may be perceived as unhealthy."
During the financial crisis that shook the economy to the brink
in Sept. 2008, dividends were suspended or reduced to minimal
levels by all 19 of these select banking groups. The new stress
tests set in place a mechanism so that, if institutions pass the
tests, banks can hike their dividends to as much as 30% of their
post-tax net income.
However, those participating institutions, such as Suntrust
Banks Inc.(STI), KeyCorp (KEY) and Regions Financial Corp. (RF),
that haven't repaid taxpayer-funded capital injections from the
crisis-response Troubled Asset Relief Program, are unlikely to be
permitted to hike dividends.
The Fed said in a statement that big banks must repay TARP funds
and satisfy other conditions related to TARP before the central
bank can consider letting them take other capital actions.
Regulatory analysts contend that this provision means banks with
TARP funds simply won't be permitted to hike dividends.
However, TARP investment or not, all 19 banks are expected to
submit capital plans to the Fed. Those financial institutions that
still have TARP investments are expected to submit plans for how
they will pay back TARP. Included in those plans, these banks can
explain how they will reinstate a larger dividend once TARP is paid
back.
Officials from Keycorp and Regions declined to comment on their
capital plans. SunTrust spokesman Michael McCoy said the
Atlanta-based institution will be submitting capital plans to the
Fed explaining how it is willing, and able, to repay the
government's investment in the company "at the appropriate
time."
"SunTrust is participating in the Federal Reserve's evaluation
of bank capital plans including a revised stress test, and we
expect our TARP repayment discussions will occur formally within
that context," he said.
In addition to SunTrust, KeyCorp and Regions, the other
financial institutions expected to submit capital raising plans are
J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo
& Co., (WFC), Goldman Sachs Group Inc. (GS), GMAC LLC, Fifth
Third Bancorp (FITB), Bank of America Corp. (BAC), Morgan Stanley
(MS), PNC Financial Services Group Inc. (PNC), U.S. Bancorp (USB),
BB&T Corp. (BBT), American Express Co. (AXP), MetLife Inc.
(MET), Bank of New York Mellon Corp. (BK) and State Street Corp.
(STT)
Banks with TARP funds must limit dividend payments to one cent
per common share.
Alston's Smith agreed that the Fed will likely approve some
dividend increases. "I don't think the Fed would have gone through
this exercise unless they would approve some dividends," Smith
said.
Bank of America has paid back its TARP investment and Charles
Noski, the institution's chief financial officer, said Monday that
the Fed has confirmed that the company has fulfilled its final TARP
commitment, which was to increase its equity by $3 billion through
asset sales.
NAB Research's Bush says that the Fed's approval of Bank of
America's asset sales puts the company one step closer to being
permitted to hike its dividend payout. However, she added, that the
bank must still be evaluated on its capital levels and ability to
absorb other types of losses.
Once the plans are submitted, the Fed plans to evaluate each
institution based on how they plan on meeting Basel III bank
capital requirements, which required banks to eventually hold
top-quality capital totaling 7% of their risk-bearing assets.
The Fed said banks seeking to hike their dividends must take
into account risks on the horizon such as their ability to absorb
losses on litigation and other costs including suits from investors
seeking to force banks to repurchase or "put-back" bad mortgages
the banks sold them. Bank of America, for example, is being sued by
investors including the New York Fed that demand the lender
purchase $47 billion worth of mortgages. The lender recently
settled similar claims with mortgage buyers Fannie Mae (BRTPF) and
Freddie Mac (FMCC) in a deal that was well received on Wall
Street.
The Fed will also consider how each institution anticipates how
the sweeping bank reform statute, the Dodd-Frank Act, will impact
them in the coming years.
The Fed is expected to privately let the 19 big banks know
whether they can hike their dividends by March 22. However, it will
be clear in the weeks following the central bank's decision which
banks were permitted as approved financial institutions publicly
announce plans to increase their dividends.
Analysts are pegging dividend increases at several of these big
lenders. For example, J.P. Morgan is seen lifting 2011 payouts to
62 cents a share from last year's 20 cents, according to a FactSet
compilation of estimates. Wells Fargo's are seen climbing to 45
cents from 20 cents, and PNC's are seen growing to 71 cents from 40
cents.
The Fed's plan to release the results privately is a very
different approach to the Treasury's public disclosure of results
of federal stress tests in May 2009. Then, the Treasury Department
publicly called on nine large financial institutions and GMAC to
raise $74.6 billion in private capital.
-By Ronald D. Orol, 415-439-6400; AskNewswires@dowjones.com