The latest batch of major bank earnings is in the books, and the news has been stellar. Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) all reported better-than-expected earnings over the past two weeks, and all appear to be fully on the path to recovering from the depths of the 2008 financial crisis. And while not all of these banks have fully recovered from the ravages of the meltdown, their recent earnings showings have many investors pining for a bigger slice of the pie via increased dividends.
So far, the banks haven’t been willing to open up their purse strings and return dividends to shareholders. The rational behind this lack of a bigger dividends is that the banks really don’t know if they are out of the woods yet, both in terms of shoring up their balance sheets and in terms of what kind of headwinds they’re likely to face from new financial industry reform legislation.
In a recent letter to shareholders, JPMorgan Chase (JPM) CEO Jamie Dimon wrote that his firm would like to increase dividend to an annual range of 75 cents to $1 a share, well above the rather anemic annual payout of 20 cents per share. Mr. Dimon said that the increase is contingent upon the improvement of factors such as unemployment, a reduction in charge-offs for consumer credits, and a better take on what the new bank capital requirements will look like.
Mr. Dimon’s concerns over what kind of capital requirements Congress will mandate on banks indeed make increasing dividends a risky proposition. But traditionally, banks consider two primary factors when deciding whether they can afford to pay dividends—earnings and capital adequacy.
We’ve already seen solid improvement on the earnings front over the past two weeks, and while banks still are dealing with some high delinquency rates, they continue adding nicely to their top- and bottom-line. On the capital front, banks are now very well capitalized by historic standards. It’s well known that within the industry that a Tier 1 capital ratio (the ratio of a bank’s core equity capital to its total assets) of above 6% is considered well-capitalized. By this measure, then all four of these banks are in great shape.
Bank of America (BAC) has a Tier 1 capital ratio of 10.2%, while Citibank‘s (C) Tier 1 ratio is 11.5%. JPMorgan Chase has an 11.5% measure, while Wells Fargo has a 10% Tier 1 ratio. Using this measure, banks are way overdue to start giving back some of their largess to shareholders. Yet despite strong earnings and solid capitalization, it seems like no bank wants to start giving back dividends when they aren’t sure what kind of capital requirements they’ll face in the future.
So, maybe instead of focusing on banks investors should focus on Congress. Lawmakers need to hurry up and decide what kind of requirements banks need, and then maybe they banks can start giving shareholders the dividends they deserve.
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