The market’s first take on the Federal Reserve’s stress test of U.S. banks has been to divide bank stocks into “naughty” and “nice.”
But I’d like to dive a little deeper and look at how banks that have been told by the Fed that they can pay out more on dividends or increase their programs of share buybacks have chosen the divide those payout streams. That’s because I think investors get a lot more reward from a dividend increase than they do from a buyback. It makes sense, to my way of thinking, to go with the banks that emphasize dividends over buybacks—all else being equal, of course.
In the market’s first cut on the Fed list banks such as Bank of America (BAC) that have received the Fed’s stamp of approval on their capital plan for stock buybacks and/or dividend increases have seen their share price move up today. Bank of America shares, for example, closed up 3.8%.
Banks that got a thumbs down from the Fed and will have to resubmit their plans closed down today. BB&T (BBT), for example, finished off 2.36%. (It’s hard to say that JPMorgan Chase (JPM) was down today because the Fed told the bank to improve its capital plan. The bank and CEO Jamie Dimon took heavy fire yesterday from a Senate report that ripped the bank’s culture and risk controls in the London Whale trading debacle. JPMorgan Chase shares closed down 1.92% today.)
But the banks that got approval to increase their buybacks or dividends have put together very different mixes.
Some banks chose to increase their share buyback programs but not to increase their dividends. Citibank (C), for example, announced a new $1.2 billion program of share purchases but kept its dividend at a penny a share. That’s not exactly a rousing vote of confidence by the bank’s management in the bank’s cash flow going forward. It’s hard—and very visible—to cut a dividend once announced. It’s much easier to announce a big buyback program and then to execute only a part of it if times turn tough. Bank of America was another bank announcing a big buyback–$5 billion—without a dividend increase.
Most of the banks that got the Fed’s approval chose a mix of dividends and buybacks. Banks that wanted to send a message of confidence to shareholders seem to have picked an increase in the neighborhood to 20%. Wells Fargo (WFC) raised its dividend by 20%. US Bancorp upped its dividend by 18%. Both banks also announced buybacks. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/)
A very few banks went for all dividends. Capital One (COF) is the standout here. The bank announced a 500% increase to 30 cents from 5 cents.
The financial sector has been a clear leader in the rally to all time highs in the U.S. stock market. Right now I’d be looking at bank stocks where management is demonstrating a commitment to taking care of shareholders with higher dividend payouts.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any company mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Forget about such nuanced worries as a declining net interest margin or a cut in share buybacks. Those are problems for investors in healthy banks such as JPMorgan Chase (JPM), Wells Fargo (WFC) and U.S. Bancorp (USB) to worry about.
Fourth quarter earnings announced today before the New York markets opened by Citigroup (C) and Bank of America (BAC) say that those banks have more basic problems: such as lower than expected revenue and a continuing drag from their mortgage business.
Citigroup reported earnings of 69 cents a share, 27 cents a share below the Wall Street consensus of 96 cents a share. Revenue of $18.66 billion was below the Wall Street projection of $18.85 billion.
The earning miss was a result of a continued parade of special charges including $1.3 billion in legal changes, a $305 million charge for settling mortgage claims with regulators, a $1 billion charge for previously announced layoffs, and a $485 million write down in the value of the bank’s own debt. Some of those charges were likely to be included in analyst estimates and some aren’t. That makes it hard to tell exactly how much of the apparent 27 cents a share miss was an actual miss.
One big surprise, though, came in the bank’s mortgage business. While banks such as Wells Fargo and U.S. Bancorp spent part of their recent conference calls talking about taking market share in the mortgage business, Citigroup seemed to be saying that, from its perspective, the mortgage crisis wasn’t over. The bank reported that it had released only $86 million in loan-loss reserves to earnings in the quarter. That’s a huge drop from the $1.5 billion release in the fourth quarter of 2011 and the $900 million release in the third quarter of 2012. The bank did continue to work down troubled assets in Citi Holdings, its bad bank. Assets in Citi Holdings fell $69 billion to $156 billion from the fourth quarter of 2011. At the end of the quarter, the bank’s Basel III Tier 1 Common Ratio was 8.7%.
Bank of America reported fourth quarter earnings of 3 cents a share, a penny above the Wall Street consensus. But the bank badly missed on revenue reporting $18.9 billion when Wall Street was projecting $20.72 billion. Read more
If this morning’s earnings report from Wells Fargo (WFC) was any indication, this isn’t going to be a very pretty earnings season for the shares of the largest U.S. banks.
Wells Fargo reported record net income for the fourth quarter and the full 2012 year, and record earnings per share of 91 cents. That was a 25% jump from the fourth quarter of 2011. Revenue climbed by 7% year over year. Deposits grew during the quarter by 3% and the bank’s core loan portfolio increased by the same percentage. Charge-offs against bad loans were lower by 19% from the fourth quarter of 2012.
And yet the stock closed down 1.12% because all that Wall Street paid attention to was the shrinking net interest margin at Wells Fargo. With the Federal Reserve doing all it can to bring long-term interest rates down, net interest margins—the difference between what a bank pays for the money it lends and what a bank gets paid on its loans—has been falling across the sector and is set to continue to fall. The net interest margin fell again at Wells Fargo in the fourth quarter, declining another 0.1 percentage point to 3.56%.
I think a lot of analysts share the opinion voiced after earnings by Credit Suisse that Wells Fargo is the “best positioned among our banks for rising short-term interest rates,” but with the Fed saying that it plans to keep rates at current low levels until 2015, I could hear the impatience in the conference call today. Read more
A strong earnings surprise from Citigroup (C) this morning has lifted the banking sector—well, except for Wells Fargo (WFC) and US Bancorp (USB). Citigroup reported third quarter earnings of $1.06 a share, 7 cents a share better than the Wall Street consensus. Revenue climbed just 3% year over year but at $19.41 billion still very handily beat the Wall Street consensus of $18.78 billion.
As of 2 p.m. New York time shares of Citigroup were up 4%. Shares of JPMorgan Chase (JPM) were up 1.71%. Shares of PNC Financial (PNC) and Bank of America (BAC), which report tomorrow and Wednesday, were up 0.46% and 2.52%, respectively. Wells Fargo was down 1.58% and US Bancorp, which reports Wednesday, was off 0.99%. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
Unlike Wells Fargo and JPMorgan that last week that said they thought the mortgage and housing markets had turned a corner, Citigroup was much more reserved with Chief Financial Officer John Gerspach saying that the housing market, despite signs of stabilization, still had significant challenges to face. “I don’t use phrases like ‘turn the corner,’” he added.
Instead Citigroup’s story this quarter had much more in common with the bank’s reports in previous quarters. Read more
Moody’s downgrades 15 global investment banks–after anticipation of the downgrades helps push stocks lower
Today’s downgrade of 15 big global banks is just the latest stop on Moody Investor Service’s world tour of the financial sector. Back in February, Moody’s announced that it would review the credit ratings of 17 global investment banks. On May 14 it downgraded the credit ratings of Italian banks that included UniCredit (UCG.IM in Milan) and Intesa Sanpaolo (IPS.IM in Milan or INPY in New York.) On May 18 it downgraded 16 Spanish banks including Banco Santander (SAN). June 6 brought downgrades to seven German and three Austrian banks.
And today Moody’s downgraded Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland Group, Societe Generale, and UBS. (Moody’s had already downgraded Macquarie Group and Nomura Holdings on March 15.)
Bank stocks were hammered today in anticipation of the downgrades. For example, shares of America (BAC) fell 3.93%, shares of HSBC (HBC) declined by 2.46%, and shares of JPMorgan Chase (JPM) dropped 2.58%. The drop in bank shares helped power today’s 2.23% fall in the Standard & Poor’s 500 stock index.
Why does the downgrade matter? Read more