The banks have been whipped long enough. Now they're free to fight back, doing it with dividends and stock buybacks. Investors love it.
After years of scrutiny by regulators and disdain by investors, banks are starting to emerge from their self imposed hall of shame. They've raised more capital and cleaned up a lot of their messes, taken lots of loan loss reserves and are now negotiating with some homeowners to reduce their mortgages. Everything isn't perfect but at least some of the handcuffs have been removed to let the largest banks get back to business.
One of the first things JP Morgan (JPM) did after the Fed said 15 of the 19 major banks tested could return capital to shareholders was to raise its quarterly dividend from 25 cents to 30 cents and approved a $12 billion stock repurchase program this year. The buyback will depend on market conditions. That was immediately after the Fed gave them a "no objection" approval, based on the latest stress test. The stock went up 7% on the news or $2.85.
Jamie Dimon, CEO, said: "We are pleased to be in a position to increase our dividend and to establish a new equity repurchase program. We expect to generate significant capital and deploy that capital to the benefit of our shareholders."
Dimon said previously that many banks will have more capital than they need as customers pay back loans and losses from the financial crisis subside. While his view would seem to contradict requirements that banks meet higher capital thresholds by 2019, the approval of JPMorgan's distributions indicates regulators decided the bank has enough capital to make the payouts and meet the new thresholds.
Shortly after JPM's announcement others followed. BB&T Corp. (BBT) hiked its dividend 25% to 20 cents a quarter. Key Corp. (KEY) announced a $344 million share buyback. Morgan Stanley (MS) got an all clear from the Fed as well. US Bancorp (USB) immediately bumped its quarterly dividend by 56% to 19.5 cents (78 cents annually) and authorized up to 100 million shares be repurchased.
But four banks didn't get approvals. They were Citi (C), Ally Financial, and SunTrust (STI) and one other. The reason: when stressed by the Fed, their tier 1 capital ratios were below 5%. Under severe conditions, Ally had 2.5%, SunTrust had 4.8% and Citi had 4.9%. Until they can improve their capital ratios above 5%, they'll stay on the naughty list. There was a fourth bank that didn't make the cut but the Fed didn't name it.
Maybe the worst is over for investors that hold bank stocks. The stress test was severe and suggests that if 2008 were to be repeated there won't be another crisis. But history rarely repeats itself exactly. Some new and different problems may arise that require banks to weather economic storms with layers of capital. No matter. The worst case scenario, at least for the moment, is that some major banks are back, healthier and more ready to do business. Now all they need is to loosen up a little and make loans. Then the whole economy can breathe a little easier.
- Ted Allrich
March 13, 2012