U.S. banks' buybacks, dividends may be no reason for shareholder celebrations
By David Henry
NEW YORK (Reuters) - Big U.S. banks, including JPMorgan Chase & Co (JPM.N: Quote) and Citigroup Inc (C.N: Quote), are expected to win Federal Reserve backing on Wednesday to buy back more shares and increase their dividends in the coming year, but the approvals may be as much about the institutions’ financial engineering as any improvement in their health.
Much of the money for buybacks and higher dividends is coming from the banks issuing securities known as preferred shares. These shares are a type of equity that pays regular, relatively high dividends. To investors they look a lot like bonds that pay interest. But for regulators, preferred shares serve as a cushion against any future losses, in part because they never have to be repaid.
Critics of the strategy question how sustainable it is, as banks essentially take money from one set of investors and give it to another, and at an added cost.
Issuing preferred shares to pay for common share dividends and buybacks is a symptom of a "zombie banking system," said veteran banking analyst David Hendler of independent research firm Viola Risk Advisors.
"Banks should be building capital from normal lending and trading profits, but their operating income is terrible," he added.
Income has been falling or stagnant at the biggest Wall Street banks, thanks in part to big legal settlements stemming from the financial crisis. For the U.S. banking system as a whole, operating income in 2014 was $151.15 billion, down 0.4 percent from the year before, according to the Federal Deposit Insurance Corp.
Spokesmen for Citigroup, JPMorgan and the Federal Reserve declined to comment.
To be sure, the steps banks are taking are within regulators' rules. The Federal Reserve allows banks to use preferred shares for at least part of their capital. Continued...