Investors may wait longer for higher dividends from U.S. banks

Tue Jan 13, 2015 6:30am EST
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By Peter Rudegeair

NEW YORK (Reuters) - Investors had hoped that the biggest U.S. banks would boost dividend payments substantially in 2015, but recent events including slumping oil prices will make it harder for banks to pay out more.

The big banks are already holding more capital than regulators have said they will need by the end of 2018. As banks begin reporting fourth-quarter earnings this week, starting with JPMorgan Chase & Co and Wells Fargo & Co on Wednesday, investors could learn that banks became even more over-capitalized in the last three months.

But hopes that some of that capital will find its way to shareholders seem likely to be unfulfilled. Expected loan losses are rising, especially in the energy sector, and trading markets are becoming more volatile, which makes bank assets riskier. Regulators are less willing to approve big increases in dividends or share buybacks when assets are riskier, analysts said.

Banks' likely difficulty in raising dividends or buying back more shares would be only the latest headache for investors. Since the 2008 financial crisis, partly caused by banks' bad lending and bond underwriting practices, banks have entered huge legal settlements and have struggled to boost their revenue. Historically low interest rates have also depressed earnings.

Paying higher dividends was supposed to be a spur to boost stock valuations in the sector.

Banks pay out a much lower percentage of their earnings than they used to. Between 1999 and 2006, big banks on average paid about three-quarters of their income out as dividends or share buy backs, according to analysts at Credit Suisse, but the ratio in the last few years has been under 50 percent.

The decline in payouts comes in large part because regulators started overseeing dividend payments and share buybacks in 2009. The Federal Reserve was looking to prevent a repeat of 2007 and 2008, where banks paid out more than they earned. Banks have trouble cutting dividends in tough times because they fear the move will signal weakness to customers and investors, further weakening their business.

Investors are unsure when that will change.   Continued...

People walk by the JP Morgan & Chase Co. building in New York October 24, 2013. . REUTERS/Eric Thayer