Bank Investors Face Wait For Richer Dividends

NEW YORK (Dow Jones)–It will likely take until later this year, or even longer, for the healthiest U.S. banks to cut fatter dividend checks to investors.

With the depths of the financial crisis one year removed, bank investors have started speculating over when the healthiest American banks could finally raise their dividends to pre-crisis levels, or return capital to investors by buying back stock. In 2008, regulators pressured bankers to slash their regular payouts to shareholders in order to preserve precious capital.

Now, as capital levels at banks soar past pre-crisis levels, bank investors have started asking bankers when to expect dividend increases.

But bankers remain uncertain over the future shape of financial regulation, and how much capital Congress and regulators will require them to hold. Banks are also undecided about how well the economy can continue to recover and, by extension, whether losses from bad loans will fade soon or endure for quarters or years.

On Wednesday, one investor asked Bank of America Corp. (BAC) CEO Brian Moynihan during a presentation when the bank would start earning profits typical of a normal economy.

“Some time in the future,” Moynihan said, to laughter.

Even the strongest banks have said they’re in no rush to raise dividends.

“We really want to see a real recovery,” said J.P. Morgan Chase & Co. CEO Jamie Dimon said in January, and that a dividend increase would not be likely until mid-2010. At an investor day in February, Dimon reiterated that J.P. Morgan would not raise the dividend until they are sure the banking environment has improved.

As the economy plods back toward health, lawmakers and regulators are reimagining the future of banking. Sen. Christopher Dodd (D., Conn.) has said he’ll release a draft for new regulations within days. Regulators have also been pressing banks to raise capital levels past formal requirements, making it difficult for bankers and investors to know how high they’ll eventually grow.

“The greatest impediment to raising dividends is uncertainty around legislation,” said Ernest Patrikis, partner at White & Case. Once the regulatory landscape becomes more clear, he said, “It’s going to be hard for regulators to stand in the way of a bank that has enough capital” to raise its dividend.

“You have to know the rules,” said a banker at one large firm. “Then you can contemplate the business decision” of raising dividends.

The Federal Deposit Insurance Corp. and other regulators have not publicly made comments limiting banks’ ability to buy back shares or raise dividends. There’s also no indication that any big banks have asked regulators to hike their payouts.

Government officials have said publicly they want banks to stabilize their financial condition and to increase their lending.

Since banks pay dividends or buy back shares with cash, such moves reduce common equity, which is lenders’ first line of defense against losses. In the wake of the credit crisis, when banks’ common equity fell sharply, regulators demanded that banks raise common equity.

The Federal Reserve in December instructed bank holding companies that participated in last year’s government stress tests to consult the Fed before boosting dividends or buying back shares. Any actions that would reduce a bank’s common equity would require additional analysis and documentation, the Fed said.

The Fed’s measure is temporary, and is set to be reviewed at the end of the year.

Marshall Eckblad, Meena Thiruvengadam and Michael Crittenden, Dow Jones Newswires