bearfund

Dividends in Danger at Regional Banks?

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.