Dividends in Danger at Regional Banks?

Yesterday I spoke with Jud Pyle, Chief Investment Strategist at The Options News Network, about trading action this week in regional bank names like Wells Fargo (WFC) and US Bancorp (USB). These stocks have been punished lately, along with the rest of the regionals, despite the fact they have reported no significant losses due to subprime risk and foreclosures. Both of them hit fresh 5 year lows yesterday on conjecture by investors that, as Pyle says, might go something like this: "Yeah, we know you haven't told us about losses from demonstrated bad business practices, but since we can't be sure, we're gonna need to sell you anyway."

Did the lending standards of these banks falter at all like some other regional banks, such that their financial stability will be greatly threatend? Until we know, investors are still adopting the best practice for financial uncertainty, in use since the Bear Stearns meltdown: if in doubt, shoot first! Unlike KeyCorp (KEY) and FifthThird (FITB), two among a handful of regional banks that had to cut their dividend, WFC and USB are still trading well above book value. As of 2:30pm EST yesterday, both WFC and USB had recovered strongly with the broad market from new lows hit in the morning.

Jud Pyle and I also discussed the impact of potential dividend cuts on options pricing, and why Freddie Mac (FRE) and Fannie Mae (FNM) could have substantial interest in their debt offerings while the stocks continue to tank. Check out my complete interview with Pyle by following this link directly to the video.

Speaking of recovering from potential bottoms, the trading action in the XLF yesterday, the financial sector ETF, showed some interesting signs of panic-driven volume capitulation. Friday was the first day ever over 300 million shares, and volume yesterday spiked to over 375 million with about 90 minutes left in the trading day! The XLF yesterday reached an all-time low, since its inception almost 10 years ago, of $16.77. We'll be watching this action today for clear signs, but it definitely has the ear-marks of a short-term bottom.

Comments

[Ames Tiedeman:]

Slash, cut, erase. This is what is going to happen to these dividends.

2008 Jul 16 07:37 AM

[valueinvest...:]

WFC raised there dividend this morning making it 21 straight years they have done so. I guess you can take that one off the list.

2008 Jul 16 08:17 AM

[jimmy smith:]

also, USB said they will likely raise their dividend. i guess you can take them off your list.

USB's earnings increased last Q. they were down from 2007, but the were positive unlike a lot of other banks, like WFC. the company grew its asset base and shareholder equity.

2008 Jul 16 09:59 AM

[bearfund:]

Can you provide one good reason either company should cut its dividend? Didn't think so. As you know, knowingly concealing losses from the market is a crime. While I don't doubt that some banks, especially I-banks, have doctored the books a bit and perhaps generously valued their level 3 assets, I see no indication or reason to believe these far more conservative banks have done so. Nor do I see any reason to think they need to. WFC raised its dividend already.

USB's CEO said he expects to do the same, for the 37th straight year. USB's nonperforming assets are at $1.14b - 0.69% of all loans. Regulatory capital stands at 8.5%. And it made a decent profit even after increasing loss provisions. If you read the transcript, you know that Davis talked about keeping his powder dry and said it was prudent to increase reserves, but also noted opportunities for growth - opportunities management felt were worth suspending share buybacks to pursue. Does this sound like a company that's panicking, on the ropes, or mismanaged? I sure don't think so, and neither does Mr. Market: shares have risen over 15% off their lows. The dividend is well-covered by earnings and leaves enough cash to continue growing the business and adding to reserves as necessary. The shares are now trading under 2x book (one of the key signs I was waiting for) and below 10x earnings, a reasonable valuation for a conservative bank offering a yield north of 7%.

While downside risk remains, I took the opportunity yesterday to begin building a position in USB. I've already been rewarded, and expect those rewards to continue for many years to come. The next few quarters will not be very good, but banking crises can last only so long, and with minimal exposure to risky business and the Fed running the printing presses at full blast there is a limit to how much USB can realistically lose.

There's another way to look at this, too: USB is well capitalised and conservative, with high-quality assets. If it fails, it's likely that the entire banking system has collapsed. So I like it as a complement to my long position in gold and my short positions in Treasuries.

2008 Jul 16 10:50 AM

[helplessobs...:]

BB&T bank has recently increased its dividend to $0.47 per quarter. They report tomorrow and I expect 65 to 75 cents for the quarter. Business will be down and any additions to loan loss reserves will be in the construction area as they have no sub-prime loans on their book. I expect Chairman Allison will be looking over the wreckage of WB and make some investments in underpriced assets.

2008 Jul 16 11:46 AM