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S&P Warns About ‘Excessive’ Bank Dividends

Standard & Poor’s issued a warning on Thursday to big banks itching to increase their dividends: proceed with caution.

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S.&.P., one of the three largest credit rating agencies, said in a report that it “remains wary of banks aggressively increasing capital returns to shareholders at this juncture of the economic recovery.” S.&.P. indicated it might downgrade credit ratings at banks that made “excessive” payouts to investors.

Several big banks unveiled plans in recent days to raise their dividends and buy back stock for the first time since the financial crisis.

They did so soon after getting the green light from the Federal Reserve, which recently completed a second round of stress tests on the nation’s 19 biggest banks.

On the heels of receiving its stress test score, JPMorgan Chase said it would buy back stock worth $15 billion and raise its quarterly dividend to 25 cents a share, up from 5 cents.

Last Friday, Goldman Sachs said it would pay back the $5 billion it received from Warren E. Buffett at the peak of the financial crisis.

Regulators waited for the banks to rebuild their capital levels and profit before blessing the payouts. But S.&.P. still sees room for improvement. Banks need an 8 percent risk-adjusted capital ratio to weather another economic meltdown, the report said.

The average bank in the United States featured a 7.6 percent rate in late 2010.

“We are therefore wary of a bank’s possible decision to return a large portion of capital to shareholders in 2011,” the report said.

S.&.P. is particularly concerned about the payouts “in light of continuing global macroeconomic issues,” citing the recent rise in oil pricesand the earthquake in Japan.

JPMorgan and Goldman Sachs are in the safety zone, with risk-adjusted capital levels of 8.2 percent and 8.3 percent, respectively. But several banks that rushed to announce dividend bumps fall below the 8 percent threshold.

State Street’s risk-adjusted capital ratio is 6.2 percent. The bank plans to raise its quarterly dividend to 18 cents, up from a penny.

S.&.P.’s report does not object to such “modest” dividends bumps. It instead raised concerns about share buybacks and special dividends.

BB&T has announced a modest 1 cent dividend increase and a 1 cent special dividend, effective May 2. Wells Fargo plans to issue a special dividend of 7 cents. State Street plans to buy back about $600 million worth of stock.

The report warned that “excessive” special dividendsand stock repurchases “could hinder the ability to build additional needed capital.” The report did not define “excessive” and did not call out any banks by name for drafting imprudent capital plans.

Of course, not every bank has the luxury of returning capital to shareholders. The Fed, for instance, put the kibosh on Capital One’s dividend plans.

The Fed also objected to Bank of America’s plans to award a “modest” dividend increase in the second half of 2011.

The bank, which currently issues a token dividend of a penny a share, plans to tweak and resubmit its proposal in the coming months.

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