When will bank dividends pick up?

Robbert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are two types of things equity investors receive from their holdings: annual reports and dividends. As the market for used annual reports is very modest, it is dividends where investors must look for their rewards. For investors in the financial sector where profit growth will not be very magnificent in the near future (thus tempering the prospects of even higher future dividends), present dividends are extremely important. Currently Bank of America (NYSE: BAC) and Citigroup (NYSE: C) are the only major US banks not to pay a decent dividend while their shareholders have been hungry since 2008. ING (NYSE: ING), a large non-US based bank but nonetheless interesting when it comes to the topic of dividends, also hasn’t returned a single dime since 2008.

In order to pay dividends banks need a solid Basel III tier 1 common ratio (B3T1C). For Citigroup and Bank of America these capital ratios have increased tremendously over the past quarter as they adjusted their balance sheets to the new capital regime. As for ING, Basel III seems to be no problem with a Core tier 1 ratio of 11.9% after the recent asset sales. ING ultimately needs 10.5% (7% +2.5% counter cyclical buffer +1% for being a minor worldwide SIFI). The SIFI buffer is 2.5% for Citigroup and 1.5% for Bank of America.
The needs and achievements in Basel III capital ratios are listed in the table below

  Needed by 2019 ...Including Cyclical buffer Already achieved
BAC 8.5% 11% 9%
C 9.5% 12% 8.6%
ING 8% 10.5% 11.9%

Short-term outlook

From this quick overview it looks like Citigroup has to save some more dollars before returning capital to its investors. Citigroup had its capital return plans rejected after the Fed’s 2012 stress test. In January they will most probably submit a new plan for returning capital in 2013. As the previous plan was rejected, the new one will probably not be that bold. Bank of America on the other hand, doesn’t need a much higher B3T1C for the near future and will most likely pay meaningful dividends in 2013 and 2014.

From the capital requirements in the table one could conclude that ING is ready to return capital to shareholders. The truth of the matter is that it can’t because it would have to pay 300 million times 125% of the per share dividend to the Dutch state. ING has already stated multiple times that it will not pay dividends because of this penalty. Also, ING really needs the capital for the spin-off of its Dutch insurance business and to cover the associated double leverage which the holding of the ING bank and insurance business is allowed to have under Dutch law. This spin-off will most likely take place in 2015. The last repayment of the core tier I securities to the Dutch state is scheduled for early 2015 which means that an interim dividend can be paid in 2015. So ING stockholders will have to be patient for their eagerly awaited returns.  

Long-term prospects

For the more distant future Citi would need another $10.58 billion in retained earnings to get to the 9.5% and $ 41.50 billion to reach the 12% B3T1C (while maintaining the current level of risk weighted assets). Bank of America has yet to save another $30.46 billion to reach an 11% B3T1C by 2019. Now let’s have a look at when these banks will approximately achieve their capital goals. Bank of America earned 4.0 billion (after preferred dividends) and Citi 7.3. At this rate of earnings Citigroup will have reached the fully loaded capital requirements in Q2 2018 and Bank of America in Q2 2020. In order to realistically get there on time Citi and BoA must work hard to lower their RWAs or increase net profits. As earnings are the factor that’s hardest to influence in this equation, Citi is on the right track with decreasing assets through the run-off of Citi holdings.

Bank of America shareholders will be rewarded for their patience shortly but might get disappointed if earnings don’t pick up. Shareholders of Citigroup will need to be patient a little while longer, but will likely see a both attractive and sustainable dividend within 5 years. For ING shareholders the future is uncertain as much depends on the success of the upcoming divestments, although medium-term relief will come in 2015.


Investor89 owns shares of ING Groep N.V. and Citigroup Inc. The Motley Fool owns shares of Bank of America and Citigroup Inc. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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