Fed is Poised to Allow Healthy Banks to Increase Dividend Payments

The Federal Reserve is poised to allow healthy banks to increase dividend payments for the first time since the financial crisis, an anxiously awaited set of instructions that could provide a boost to bank stocks.
According to people familiar with the matter, regulators as soon as next week are expected to give guidance outlining the standards banks must meet to increase dividend payments. The Fed is expected to take a conservative approach that would require banks to demonstrate their ability to meet tough new international capital standards and any requirements stemming from the U.S. financial-regulatory overhaul.
Many U.S. banks are itching to boost payments to shareholders, citing improved profits, because they have long relied on a steady stream of dividends to lure investors. But they have been in a holding pattern as regulators across the globe hashed out new rules requiring banks to hold more capital as a buffer against future losses. Moreover, in the wake of the crisis, regulators have closely scrutinized banks' use of capital, essentially freezing their ability to increase dividends.
The Fed isn't expected to approve dividend payments en masse but will look at an individual institution's ability to meet the criteria it outlines, according to people familiar with the matter. It is likely, however, to give approvals in batches within the same quarter, to avoid putting any one firm at a competitive disadvantage.
A big part of the Fed's thinking are lessons learned from Japan, where prolonged uncertainty about the health of Japanese banks stymied that country's economic recovery. Regulators want healthy banks to get credit from the markets for increasing their capital bases.
Some banking analysts said allowing firms to increase dividends would telegraph to the markets that the financial sector is continuing to stabilize. "It signals that the health of the system has improved and will continue to improve going forward," said Todd Hagerman, an analyst with Collins Stewart.

Wells Fargo & Co. Chief Financial Officer Howard Atkins said Thursday that returning capital to investors is a "high priority" for the fourth-largest U.S. bank in assets once regulators approve doing so.

Wells Fargo shrank its quarterly payout by 85% last year. Citigroup Inc. hasn't paid a quarterly dividend since February 2009. Regulators allowed J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and some other financial firms to buy back their own stock recently, suggesting federal officials were softening their resistance to dividend increases.

James Dimon, CEO of J.P. Morgan Chase, said recently on an earnings conference call that he hoped the bank could boost dividend payments in the first quarter of 2011.

Dividend payments are especially important for banks now that the financial industry's outlook is clouded by the sluggish economy, toughened regulation and looming capital requirements. Despite rebounding profits, a big-bank stock index from Keefe, Bruyette & Woods Inc. is up 11.6% so far this year after Thursday's rally, surpassing the Dow Jones Industrial Average's gain of 9.7%.
While the banks were waiting for the green light to restore their payouts, other companies have been boosting dividends in recent months, making their shares more attractive, especially given the slow growth in the economy. Financials on average yielded 4.4% in 2008, making them one of the highest-yielding sectors, according to Standard & Poor's. Now they yield 1.1%, making them the second-lowest yielding sector in the market, according to S&P.

Only a handful of banks are expected to meet the Fed's test, said Frederick Cannon, co-director of research at KBW. Among those with strong enough capital ratios are J.P. Morgan Chase, US Bancorp, State Street Corp. and Bank of New York Mellon Corp., he said.

Banks, nonetheless, are unlikely to return to precrisis payout ratios, which in some cases reached 50% of earnings. Analysts said banks are more likely to return to 5% to 10% levels for the near future.
In Washington, increasing dividends could arouse the ire of lawmakers and the White House, which has complained that banks aren't lending enough. KBW's Mr. Cannon said increased payouts shouldn't crimp lending because banks are "sitting on plenty of excess liquidity."