Rescue for Falling Bank Stocks: An End to Payout Curbs

The Fed is set to lift buyback and dividend restrictions, says Piper Sandler, as the flattening curve harms lenders’ shares.

Whew, just in time. Bank investors are expecting to get good news from the Fed this coming week. And they could really use some. While bank stocks have rallied from their pandemic-onset low, they’ve fallen back lately. Probably due to the recent flattening of the yield curve.

This Thursday, the largest US banks should get the Federal Reserve’s green light to resume dividend increases at the end of this month. Limits on the lenders’ ability to buy back shares also are expected to be removed. The Fed slapped on those restrictions in June 2020, as fear about COVID-19 shuttered the economy and stoked worries that the banks—including JPMorgan Chase, Bank of America (BofA), and Wells Fargo—would suffer as they did in the 2008 financial crisis. 

Well, a reprise of 2008 didn’t happen. Presuming the banks pass the Fed’s latest stress tests, designed to assess how they’d fare in an economic crunch, their returns to pre-virus buybacks and dividend hikes would be a boon to their stocks. According to a Fed statement, “most firms” will be able return money to shareholders very soon.

Piper Sandler forecasts that banks will boost their dividends by 7.6% from present levels and buy back 6.4% of first-quarter shares outstanding over the next 12 months.

“We see little risk of any banks failing the test, and the group has extraordinarily robust capital levels,” analyst R. Scott Siefers wrote in a research report. “As such, we expect afterward to see the first dividend increases in a long, long time, and share repurchase potential could be quite significant.”

The KBW Bank Index has more than doubled from 12 months ago, and is up 21.7% this year through Friday. This month, however, it has dipped, off about a tenth. Blame the flattening yield curve, which hurts banks’ business model. They make money by taking in deposits at low interest rates, then lending the money out at higher ones.

At the beginning of this month, the two-year Treasury yielded 0.16%, and on Friday that had shot up to 0.26%. Meanwhile, the 10-year saw its yield slide to 1.45% from 1.62%.

Signs of resurgent inflation and the Fed’s statement last week that it will raise short rates in 2023 have boosted yields on short-term Treasury bonds. But in a seeming paradox, long-dated ones have fallen. Analysts say big investors, sitting on scads of cash, are eager to find a home for it. The benchmark 10-year Treasury note and its ilk are the easiest to buy.

No surprise that the banks are eager to bestow some counterbalancing manna on investors, thus burnishing the appeal of their suddenly flagging stocks. BofA last raised its quarterly dividend, to the current 18 cent per share, from 15 cents, in September 2019. The bank’s board already has authorized a $25 billion buyback, pending the lifting to the curbs. As of March 31, the company said, it had $35 billion in excess of capital requirements, and thus could easily return a chunk of it to investors.

“Assuming we get through the stress test … and I’m sure we will, and the new rules come in, we expect to increase our dividend and increase our share buybacks,” BofA CEO Brian Moynihan told Fox Business Network last week. The bank’s stock, which has almost doubled from its March 2020 recent low, is down 9.6% this month.

When the Fed imposed the current restrictions, memories of the financial crisis were abundant. In early 2009, Washington bailed out Bank of America with $20 billion and a guarantee for almost $100 billion of potential losses on toxic assets.

Related Stories:

Jerome Powell Has the Worst Fed Day Record for Stocks

Why the Fed Won’t Tighten Soon: Too Much Unemployment, Says Strategist

Why Jerome Powell Wants to Soften the Fed’s Inflation Target

Tags: , , , , , , , , ,