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For Bank Investors, Wait for Dividends Coming to End

Tuesday, 11 Jan 2011 | 2:13 PM ET

When the biggest US banks submit their capital plans to the Federal Reserve on Friday it will mark an important post-crisis milestone for the industry, clearing the way for many of them to resume providing dividends.

Keith Brofsky | Photodisc | Getty Images

Following the collapse of the financial system in 2008 and 2009, most of the industry's biggest players were forced to take government bailout money and were restricted on their ability to pay dividends.

But as part of guidelines the Federal Reserve issued in November, if the banks can meet capital requirementsand have made their required payments under the Troubled Asset Relief Program, they once again can issue dividends.

It's a day investors have been waiting for going on two and a half years.

"There's nothing more a bank would like to do than announce a dividend increase with 2010 earnings numbers," said Fred Cannon, chief equity analyst at Keefe, Bruyette & Woods in New York. "The market is all ears for dividend announcements."

The Fed guidelines establish a number of yardstickswith which banks must comply, including a 5 percent Tier 1 common equity ratio, which measures how much capital banks hold and the losses they can withstand.

Most, if not all, of those 19 biggest banks specifically targeted in the co-called stress-test requirements are likely to meet the levels as outlined. All but those that still owe TARP money are expected to announce paybacks to shareholders at some point during the year, though only those on surest footing are likely to make those announcements in the first quarter.

"The whole financial structure of the banking industry has turned around," said Dick Bove, banking analyst at Rochdale Securities of Stamford, Conn. "The reason why bank dividends are going up is because banking companies are making money, their balance sheets are loaded with excess cash, and their outlook is phenomenally good."

Several banks are expected to provide litmus tests for how strong the dividend environment will be in 2011.

JPMorgan Chase reports its quarterly earnings on Fridayand Bove said he is "not sure" whether the industry titan will announce a dividend yet.

"As soon as the capital plans are approved, which should take about three months, then the banks that do not hold TARP will likely consider dividend increases," said Erik Oja, banking industry analyst at Standard & Poor's Equity Research in New York.

Oja said he thinks JPMorgan will announce an increase, as will PNC Financial , Wells Fargo , USBancorp and BB&T —names often mentioned by banking analysts when discussing potential dividend hikes.

Bove calls Bank of America and Morgan Stanley both a "tossup."

Comerica , which paid back its $2.25 billion in TARP money last year and shortly after announced a dividend, is being seen as a template for banks coming off the government-assisted sidelines.

The moves are seen as wider reflection of the industry's return to health, even though banks are still loathe to provide credit. About two-thirds of businesses looking for credit last year were refused, according to the New York Fed, though recent data indicates that conditions are starting to thaw somewhat.

"We believe the industry is making progress and in general the key them for 2011 is capital deployment," Cannon said. "Banks have gone through capital destruction and capital raising—now it's time for capital deployment. Overall banks are fairly valued at current levels, but we do selectively like a lot of the stocks and we think will get significant dividend announcements."

Those announcements, though, will still come selectively, and dividend-raising is more likely to come in a staircase manner rather than a big jump higher.

Of the 707 TARP banks, some 111 have repaid it in full, 145 have missed their most recent payment and the rest are on time.

Should those banks free and clear of their TARP obligations start providing better returns through dividends, and show stronger balance sheets, it would provide another enticement for investors even though as an industry big bank stocks outperformed in 2010.

"Overall, now that loan growth is starting to improve interest income should start to show some growth," Oja said. "Earnings quality isn't terribly high right now and are being driven by declining loan-loss provisions and revenue growth is poor. I would expect 2001 to show some better revenue growth."

Bove, though, is far more optimistic about banks, proclaiming that even though their public name is bad, they represent excellent investor opportunity.

"We will see significant dividend raises by the banks because there's been a significant turnaround in financial conditions of bank balance sheets because there has been a significant turnaround in economic conditions of banking companies," he said. "The new golden age in banking has begun."

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