Bank stock prices have had a big run up this year. But for shareholders who have relied on banks for dividend income, the stocks have been a disappointment. With poor earnings, low capital, and bad loans clogging their balance sheets, many banks have been cutting or eliminating dividends since 1990. Now, some are poised to reverse the trend. "I think we're going to see an explosion of bank dividends in the next 18 months," says Thomas Brown, of Donaldson, Lufkin & Jenrette.
Banks will take better care of their shareholders because they're in better shape themselves. In fact, 1992 could be the most profitable year ever in U.S. banking. Commercial banks earned a record $7.9 billion in the second quarter, up from $4.6 billion in the second quarter last year. This has strengthened capital positions. Meanwhile, banks will need less capital because they are making fewer new loans by historical standards and getting rid of unprofitable old loans.
With many banks generating capital well in excess of what is required to expand their businesses, there are only a few things they can do. "Banks can buy another business, raise the dividend, repurchase stock, or hoard equity for a while," says John Leonard, a Salomom Brothers analyst.
A dividend hike will be the logical choice for an estimated 30 to 45 well-capitalized, profitable regional and money-center banks, according to several analysts. Among Leonard's picks: Wachovia, Old Kent Financial, and Core-States Financial.
REWARDS. Brown believes NationsBank will get the ball rolling by upping its dividend about 12% when its board meets in October. The Charlotte (N.C.) institution, which hasn't hiked its dividend in two years, has seen its equity rise by $1.3 billion since 1989. With almost no asset growth, its equity-to-asset ratio has jumped to 6.6% from 5.4% in that time.
Brown also thinks Bank of Boston, which eliminated its dividend in July, 1991, may reinstate it in November. That we, it could show a dividend in 1992 and retain its record as the second-longest-annual-dividend-paying bank on the New York Stock Exchange. Signet Banking could raise its dividend 50% in October to make up for last year's cut, while Bank of America might wait until 1994 because its management is more conservative.
Don't expect Citibank, Chase Manhattan, or First Chicago to suddenly get generous. They are still cleaning up their balance sheets. But a number of other banks should finally be able to reward shareholders for their patience.
by Leah Spiro
Edited by Amy Dunkin
BIGGER PAYOUTS ON THE HORIZON Bank Current Est. Earnings dividend growth 1992-93 BANKAMERICA 1.30 (dollars) 24% BANK OF BOSTON 0 25 COMERICA 1.88 21 NATIONAL CITY 1.88 21 NATIONSBANK 1.48 21 DATA: DONALDSON LUFKIN & JENRETTE