US bank dividends set to double

Financial Time– The Federal Reserve is this week expected to pave the way for a doubling of bank dividends and share buybacks when it unveils the results of stress tests on the largest US financial groups.

If Citigroup passes the test, as expected, it will be in a position to pay more than a notional 1 cent a share dividend for the first time since the financial crisis. Dick Parsons, chairman, said there would be a significant increase in the bank’s return of cash to shareholders. “We intend to move forward with some force in 2012,” he said.

Analysts expect JPMorgan Chase, among the strongest of international banks, to pay more than 70 per cent of its earnings in the form of dividends and share buybacks, close to pre-2008 levels.

Barclays Capital analysts predict that the average payout ratio for banks, excluding broker-dealers such as Morgan Stanley and Goldman Sachs, will rise from 24 per cent of earnings in 2011 to 48 per cent this year.

European regulators and some US academics have voiced concern that any such surge in capital distribution would be too much, too soon after the crisis.

Privately, US banks have complained that the stress tests are too stringent and that greater disclosure could hurt them.

The Fed told large banks to assess how their balance sheets would cope with a severe global recession, including a 13 per cent unemployment rate in the US, precipitous declines in stock markets and house prices and the sort of “market shock” that might be caused by a collapsing European bank. Only if they can show that their core capital levels would remain above 5 per cent of risk-weighted assets will banks be allowed to increase their payout to shareholders.

They are also obliged to show that their capital planning processes are sound and that they are on course to meet tougher international standards that will force the biggest banks to have 9 per cent of core capital against risk-weighted assets by 2019.

Bank of America suffered reputational damage last year when the dividend increase it promised investors was vetoed by the Fed. But this time BofA has decided against asking to distribute capital, while no bank is expected to fail.

Fed officials are determined to publish more information about the health of the country’s biggest banks in spite of banks arguing against releasing detailed data. In what some will see as a concession, Fed officials have decided to publish annual revenue estimates under the stress scenario this week rather than quarterly numbers.

“If they pass the stress tests, this could be a turning point,” said Charles Bobrinskoy, portfolio manager of the Ariel Focus Fund, whose firm has about $5bn in assets under management and has shares in JPMorgan, Citi, Morgan Stanley and Goldman Sachs. “If the banks can’t return capital, then we have a real problem with the stocks because they can’t generate reasonable rates of return on their existing capital.”