Big banks gearing up to restore dividends

By Nelson D. Schwartz and Eric Dash
New York Times / January 16, 2011

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Investors in bank stocks are about to get a big cut of the profits again.

Financial analysts say the nation’s largest banks are ready to begin restoring their dividends in the first half of 2011, after a three-year pause to repair their damaged balance sheets. The reversal could put billions in the pockets of pension funds and retirees who had viewed the shares as dependable sources of income.

Clues to how big a payout is in store came Friday, when JPMorgan Chase became the first large bank to report its 2010 performance, and chief executive Jamie Dimon said he was eager to restore the quarterly dividend as soon as regulators allow. JPMorgan earned $17.4 billion in 2010.

If the big banks deliver a second straight year of rising profits, as many analysts expect, the conditions would be in place for regulators to approve dividend increases by as early as March. As the crisis worsened in 2008 and 2009, all but a handful of financial institutions cut their once-lucrative dividends to just pennies a share, hurting ordinary investors who had come to see them as sources of income. JPMorgan, for example, now has a dividend of 20 cents a share annually, down from $1.52 before the crisis.

Overall, the financial sector of the Standard & Poor’s 500-stock index paid out $51 billion in dividends in 2007. By 2010, that figure had shrunk to $19 billion.

“It’s a significant milestone,’’ said Gerard Cassidy, a bank analyst at RBC Capital Markets. “The return of dividends signals that the banks are back, and the Federal Reserve wants to inspire confidence in the marketplace so that banks lend more.’’

The financial industry has returned to health much faster than expected, helped by federal aid programs, low interest rates, and a surging stock market.

Banks are expected to record $70 billion in profits in 2010, according to Foresight Analytics. That would be up from $12.5 billion in 2009 but remains about half the level reached in 2006, before the housing market collapsed and the financial system almost came undone.

The earnings reports for the fourth quarter of 2010 are also likely to show that corporate and consumer lending is starting to come back while losses on bad loans are continuing to ease.

Last week the Federal Reserve began another round of so-called stress tests of the nation’s 19 largest banks, evaluating their ability to remain financially healthy in the face of a still-anemic economic recovery and tough new regulations that will cut deeply into revenues. Unlike the first round of tests, the findings this time will not be made public.

Before approving a dividend increase, regulators must sign off on a bank’s stress test and conclude that the bank can meet the higher capital requirements put in place by new international agreements and the recent overhaul of US financial regulations. They also must have fully repaid any federal bailout funds.

For decades, shares of banks, along with utilities, were the favored choice of retirees and other conservative investors.

That all changed when the financial crisis struck, forcing Citigroup to cut its dividend as it braced for a wave of huge losses tied to loan defaults.

Although the bailout program did not require banks to lower their dividends in most cases, regulators all but forced many banks into making cuts by insisting that they hold more capital in reserve to cushion against losses.

By the spring of 2009, several of the largest banks — including JPMorgan, Bank of America, and Wells Fargo — cut their dividend.

Just as the banks cut their dividends at different rates over the course of months, the timing of dividend increases will probably also vary. The strongest banks, including JPMorgan, State Street, U.S. Bancorp, and Wells Fargo, should be in the first wave this spring, several analysts said.