Bank Watch

Bank of America to raise dividend to 7.5 cents – but still faces shareholder pressure

The Federal Reserve said Wednesday it would not object to Bank of America’s capital plans, green-lighting any intentions the Charlotte company might have to boost its dividend or buy back more shares.
The Federal Reserve said Wednesday it would not object to Bank of America’s capital plans, green-lighting any intentions the Charlotte company might have to boost its dividend or buy back more shares. AP

Shareholders who have been pressing Bank of America to raise its dividend learned Wednesday the 5-cent quarterly payout will rise to 7.5 cents.

But initial reaction from some analysts and shareholders Wednesday suggested pressure on the Charlotte-based bank to keep raising the dividend is unlikely to go away.

The announcement came as part of the Federal Reserve’s widely watched stress testing of the biggest U.S. banks. An outgrowth of the financial crisis, the annual checkups measure whether banks have enough capital to absorb losses and continue operating in another downturn.

Wednesday marks the first time Bank of America has announced an increase in its common quarterly stock dividend since 2014. That year, the bank won Fed approval to hike it from 1 cent per share, the level to which it was slashed during the financial crisis.

The higher payout, which begins in the third quarter, brings some relief to investors who have been pressuring CEO Brian Moynihan for years to raise the dividend. But with New York-based Citigroup announcing it has received Fed approval to raise its quarterly dividend from 5 cents to 16 cents, Bank of America will pay the lowest among the five largest U.S. banks – a fact that wasn’t lost on shareholders Wednesday.

“I would think their earnings would be more than enough to cover” a larger increase, said Alan Goozner, a 70-year-old Charlotte resident who owns about 3,300 Bank of America shares.

Bank of America declined to comment beyond a statement from Moynihan, who noted the company has been “significantly strengthened” and increased its earnings over the past few years, while being focused on growing responsibly.

“This improvement has allowed us to take a significant step toward returning more capital to shareholders,” he said.

In addition to the dividend increase, the bank also won Fed approval to buy back $5 billion in common stock.

Bank of America has previously said such buybacks are intended to reduce its roughly 10 billion in outstanding shares and increase its investors’ ownership.

Some of those shares were issued by the bank to help fund its purchases in 2008 and 2009 of Countrywide and Merrill Lynch. But by issuing more stock, the bank also reduced the ownership percentage of existing investors, a move that can drag down the value of shares.

Under the bank’s plans that won Fed approval Wednesday, it will spend about $8 billion returning capital to shareholders over the next year, including about $3 billion for the higher dividend.

Among Charlotte’s other big banks, San Francisco-based Wells Fargo and Winston-Salem’s BB&T also received the Fed’s go-ahead for their capital plans. Wells Fargo ranks second in deposits in Charlotte behind Bank of America. BB&T is third.

BB&T said its board will now consider increasing its dividend to 30 cents, from 28 cents currently, at a meeting next month. It plans also include up to $640 million in share repurchases beginning in the third quarter.

Unlike some of its peers, Wells Fargo did not detail specific plans for returning more capital. In a statement, it said it will continue paying its current 38-cent dividend, and that “any future dividend actions” are subject to approval by its board.

Much was at stake for shareholders at Bank of America and the 32 other banks subjected to Wednesday’s exams. Shoddy performance on the tests can lead to Fed rejection of proposed capital plans – a power the regulator has exercised in the past.

It exercised it again Wednesday, rejecting the capital plans of Deutsche Bank Trust Corp. and Santander Holdings USA, citing “broad and substantial weaknesses” across their capital planning processes.

Last year, the two were also the only banks to fail the exams. Santander has now failed the tests for three years in a row, and Deutsche’s U.S. subsidiary has now logged failures for two straight years.

Also Wednesday, the Fed directed Morgan Stanley to submit a new capital plan by the end of 2016 to address “material” weaknesses in its capital planning processes, though the regulator did not object to the New York company’s capital plan.

The exams check whether banks would meet the Fed’s four minimum capital ratios under recession scenarios. Failure to meet the minimums can result in an objection to a bank’s capital plans. No bank fell below the minimums this year.

In one of those ratios, Bank of America’s common equity tier 1 ratio was 7.1 percent, under the Fed’s worst-case scenario. The ratio, for which the Fed set 4.5 percent minimum, measures high-quality capital against total risk-weighted assets.

Wells Fargo’s ratio in that measurement was 6.1 percent. BB&T’s was 6.1 percent.

Wednesday’s results are the second of the two-part stress testing process.

In the first tests, for which the Fed announced results last week, the regulator examined how banks’ capital levels would fare under a hypothetical recession, without taking into account their new capital plans. In that review, the Fed found all 33 banks would have enough capital to weather a hypothetical severe recession.

Wednesday’s review, which covered capital plans banks had to submit by an April deadline, ensures the payouts won’t deplete banks’ capital to a level that prevents them from lending to businesses and households in periods of stress. The review also scrutinizes banks’ capital planning processes to determine if any practices are unsafe or unsound.

Bank of America in particular has been under pressure from some shareholders to increase its dividend, which had been 64 cents before the financial crisis. Some of Bank of America’s big-bank peers have already restored their dividends to pre-crisis levels, after cutting the payouts in the crisis under order from the Fed.

The dollar value of Bank of America’s capital plan is close to that of some of its peers.

Citigroup, for example, said its planned capital actions total $10.4 billion over the next four quarters, including the higher dividend and stock repurchase. New York-based JPMorgan Chase & Co. said it plans to buy back up to $10.6 billion in stock over the next year.

Independent bank analyst Nancy Bush, also a shareholder in Bank of America, said the higher dividend is a positive – but not enough for mom-and-pop investors who have been battered since the financial crisis. Some of those investors have seen their retirement income dwindle as the bank’s dividend has fallen.

“They have a large retail constituency that really would like to get paid,” Bush said.

“I think it should have been more dividend, less buyback,” she said. “Bank of America’s got to throw a bone to the people who’ve hung in there.”

Deon Roberts: 704-358-5248, @DeonERoberts