Virtually every major U.S. bank slashed its dividend during the credit crisis. One factor that has kept those dividends at rock-bottom levels is the lingering uncertainty concerning new capital adequacy standards. In Basel, regulators finally agreed on global minimum capital standards this month. In light of the new requirements, which banks will raise their dividend soonest?
What is this Tier 1 capital you speak of?
The new standard that banks much achieve is a minimum 4.5% common equity ratio and a 6% Tier 1 capital ratio. Tier 1 capital is the highest grade of capital, consisting of equity capital (common shares and non-cumulative preferred shares) and disclosed reserves.
In addition, the new rules call for a "conservation buffer" of 2.5% as a margin of safety for periods of rising loan losses and a "countercyclical buffer" ranging from 0%-2.5% that applies "when there is excess credit growth" (read: during a credit boom/ bubble). But the countercyclical buffer isn't the end of it. The new rules out of Basel also specify that "systemically important banks should have loss absorbing capacity" beyond these standards.
The "too-big-to-fail" buffer
All in, after adding my own indicative "too-big-to-fail" buffer of 2.5%, we finally get to a common equity ratio of 12%. How does the "too-big-to-fail" set in the U.S. measure up? The table below contains the Tier 1 common equity ratio for 16 of the 18 public-traded banks and financial institutions that the Fed and the Treasury subjected to stress tests in 2009 in order to determine whether they were adequately capitalized. Some institutions provide these ratios in their filings; in other cases, I had to derive them.
|
Company |
Tier 1 Common Equity Ratio at June 30, 2010 |
Tangible Common Equity Ratio at June 30, 2010 |
|---|---|---|
|
State Street |
14.8% |
12.5% |
|
Goldman Sachs |
12.5% |
13.5% |
|
Bank of New York Mellon (NYSE: BK) |
11.9% |
11% |
|
American Express |
10.7% |
10.4% |
|
Citigroup (NYSE: C) |
9.7% |
11.8% |
|
JPMorgan Chase (NYSE: JPM) |
9.6% |
9.9% |
|
Morgan Stanley |
9.2% |
10.5% |
|
PNC Financial* |
9% |
8.4% |
|
BB&T |
8.9% |
9% |
|
KeyCorp |
8.1% |
8.8% |
|
Bank of America (NYSE: BAC) |
8% |
5.4% |
|
SunTrust Banks |
7.9% |
8.9% |
|
Regions Financial |
7.7% |
8.2% |
|
Wells Fargo (NYSE: WFC) |
7.6% |
8.2% |
|
US Bancorp (NYSE: USB) |
7.4% |
6.9% |
|
Fifth Third Bancorp (NYSE: FITB) |
7.2% |
7.2% |
Source: Company filings. *Estimated at July 1, 2010, to account for the sale of its GIS unit.
6 banks where dividend increases may not be long coming
Only two of the largest U.S. banks meet the standard: Goldman Sachs and State Street (Goldman didn't cut its dividend in the first place.)
Even if we reduce the countercyclical buffer to zero, for a minimum common equity ratio of 9.5%, only four other institutions pass muster. They are Bank of New York Mellon, American Express, Citigroup, and JPMorgan Chase.
However, bearing in mind that these targets are being phased in gradually during this decade, I expect the authorities to allow all of these banks to lift their dividend as early as the first half of next year. In fact, JPMorgan CEO Jamie Dimon suggested to investors they might see an increase early next year at the Barclays Financial Services Conference last Monday.
4 banks that may keep shareholders waiting
At the other end of the spectrum, Wells Fargo, Fifth Third Bancorp, US Bancorp, and Bank of America all look inadequately capitalized under the new regime. Even though Wells and US Bancorp are among the best-run U.S. banks, shareholders shouldn't expect anyone in this group to raise their dividend before 2012, in my opinion (barring a capital raising, of course – which isn't out of the question). In an environment in which investors have new found respect for income, that constraint could continue to weigh on these banks' share price.
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