An article from Barron's on Wednesday's online edition.....
Investors' Soapbox PM
| WEDNESDAY, NOVEMBER 20, 2013
Banks That May Cut Dividends
Sterne, Agee & Leach
After the close Tuesday, Valley National Bancorp announced a 32% cut in their dividend.
This reduced Valley National's (ticker: VLY) (rated at Neutral) 2014 payout ratio from 117% to 76%, still well above the 32% level for all banks over $10 billion in assets. Two other Northeast banks that we believe could be in the spotlight include New York Community Bancorp (NYCB) (rated at Underperform) and People's United Financial (PBCT) (rated at Neutral).
New York Community's 96% 2014 dividend-payout ratio is well above slightly larger Comprehensive Capital Analysis and Review (CCAR) bank peers (more than $50 billion in assets) of 23%. People's United's recent capital-return levels (aggressive buybacks plus 85% 2013 payout ratio) is unsustainable, in our view.
Valley National announced a 32% reduction in their dividend rate (16.25 cents to 11 cents per-share quarterly). This reduced the 2014 payout ratio from 117% to 76%, still well above the 32% ratio for all banks over $10 billion in assets. The change in dividend policy does not come as a big surprise, as management has more recently suggested that the dividend is a decision carefully revisited by the board each quarter and they would take action necessary to protect the quality of balance sheet. Core earnings power as measured by preprovision net revenue (PPNR) has been under pressure as mortgage-banking volumes have slowed and the core net interest margin (NIM) continues to decline. PPNR was 1.01% of average assets in the third quarter, down from 1.82% in the year-ago quarter and 1.55% in full year 2012.
New York Community is projected to pay out 96% of earnings (based on consensus estimates) in 2014. Unlike Valley National, New York Community management has been adamant over the last several years that they have no plan or need to reduce their dividend. While overall profitability and earnings momentum is stronger at New York Community compared to Valley National, we would point out that management has a deep desire to become a much larger institution. To accomplish this, the company has been very clear with Wall Street that they are constantly on the prowl for acquisitions, preferably larger acquisitions which can catapult them well through the Federal Reserve's $50 billion CCAR stress-test threshold. New York Community's current asset base at Sept. 30 was $46 billion. We would point out that the average 2014 dividend-payout ratio for Federal CCAR banks is 22%.
People's United is projected to pay out 74% of earnings (based on consensus estimates) in 2014. Among banks with more than $10 billion in assets, People's United has the third-highest payout ratio....In addition to a high dividend-payout ratio, the company has been actively returning capital through share repurchases. Total return of capital (buybacks plus dividends) is expected to be 242% in 2013, up from 167% in 2012. As a result of this aggressive capital-return plan (combined with organic growth and deals), tangible capital has declined from 12.0% at year-end 2011, to 8.5% in the most recent quarter. Looking ahead, we see total-capital-return ratios of 111% and 69%, in 2014 and 2015, respectively. Given the company's size ($32 billion in assets), we believe there could be downside risks to these estimates over the next 12 to 18 months.
Thanks for the post. Joe F. has argued, in the conference calls, that the quality & consistency of NYCB's revenues (heavily based as they are in NYC rent-controlled apartment loans) should warrant the bank's being permitted to maintain its divvie even if the bank exceeds the 50M theshhold. I suspect that NYCB & the feds have already discussed this matter in detail & that NYCB's care in choosing its next acquisition is related to meeting the necessary elements to maintain the dividend.
PBCT has slowly been raising its divvie since its second stage conversion (even during the depths of the banking crisis) & has been continuing to repurchase its shares. It would be pretty bone-headed, in my view, if PBCT management now elects to (or is required to) reduce its dividend largely due to the actions that the bank has taken since its second step.
The stocks of both these banks would likely take a significant hit if their payouts are reduced, especially since it's not apparent that meaningful loan growth or NIM improvement are on the horizon. As has been noted by many elsewhere, a number of banks (including NYCB & PBCT) are now trading primarily as dividend plays.