CHARLOTTE, North Carolina U.S. banks like JPMorgan Chase & Co and Wells Fargo & Co are expected to boost dividends in 2011 after two years of paying investors almost nothing, but don't expect payouts anywhere near pre-crisis levels.
The U.S. Federal Reserve said in November it would consider allowing strong banks to hike their dividends. Since then a raft of bank executives have said they hope to be among the first to increase their payouts.
But regulators will not likely allow dividends to be too high, because profits are still recovering and it is unclear how much capital banks will need under new rules.
"Investors are so desperate for the pre-Lehman days for dividends that they don't realize how hurt these banks were during the crisis," said Matt McCormick, a Cincinnati-based portfolio manager at Bahl & Gaynor Investment Counsel Inc.
Before the crisis, banks used to pay out about half of their earnings as dividends. But this year, banks are likely to pay out around 15 to 20 percent of their earnings as dividends. Over the longer term, 30 to 35 percent is likely the best investors can hope for, analysts said.
"They'll reinstate dividends, but it's not going to be the over-sized ones people were used to," said Bill Smith, founder of Smith Asset Management, who invests in bank stocks.
Of the four largest U.S. banks, Bank of America Corp and Citigroup Inc both pay a 1-cent quarterly dividend to shareholders. JPMorgan Chase and Wells Fargo each pay 5 cents per share.
Each of the banks slashed their payouts after receiving government bailouts through the Troubled Asset Relief Program.
Bank dividends peaked between mid-2007 and mid-2008, just months before the financial crisis boiled over with Lehman Brothers Inc's Chapter 11 bankruptcy filing in September 2008.
Bank of America, the largest U.S. bank by assets, had its quarterly dividend peak at 64 cents per share from summer 2007 through summer 2008. JPMorgan and Wells Fargo paid out quarterly dividends of 38 cents per share and 34 cents, respectively.
Unlike its rivals, Citigroup cut its dividend by 40 percent in fourth-quarter 2007, from 54 cents per share to 32 cents.
But banks were broadly slow to cut dividends during tough times, which may be why regulators are so reluctant to allow higher dividends now.
According to a Moody's Investors Service analysis of 58 publicly traded bank holding companies, banks paid out more than 70 percent of their income in 2007 in the form of dividends and share buybacks, an eye-popping figure for an industry on the precipice of ruin.
WEAK EARNINGS, TOO MANY SHARES
With banks likely to generate lower profit for the foreseeable future due to higher capital requirements and increased regulation, banks are unlikely to be able to afford the big payouts of old, analysts said.
Citigroup, for example, peaked with a $21.5 billion annual profit in 2006, but posted $38 billion in losses in 2008 and 2009. So far in 2010, Citi has posted $9.2 billion in net income through the end of the third quarter.
"The business models simply won't work the way they did before. There's been a structural change in the industry," said Tony Plath, banking professor at UNC-Charlotte.
Another contributor to lower dividends per share, analysts said, will be the enormous amount of common stock banks issued during the crisis.
Citigroup's common shares, for example, ballooned from 5.4 billion shares outstanding on June 30, 2008, to 29 billion on October 31, 2010.
U.S. banks will be required to hold more capital to protect against future losses, under provisions in the Dodd-Frank Act -- the financial reform passed by Congress in July -- and the proposed Basel III global capital rules.
Some bank executives have expressed regrets about the high payouts.
BofA Chief Executive Brian Moynihan, at a Goldman Sachs banking conference in December, said he wished the largest U.S. bank by assets had cut its dividend payout earlier -- the bank did not cut its dividend until fourth-quarter 2008 -- and retained $10 billion to $15 billion in excess capital before the crisis peaked.
The Charlotte, North Carolina-based bank paid $10.7 billion in dividends in 2007 and $10.2 billion in 2008.
"I would love to have that capital back," Moynihan said on December 7.
(Reporting by Joe Rauch, additional reporting by Maria Aspan in New York, editing by Matthew Lewis)