Payout cuts unlikely at regional banks despite market jitters

Due to the uncertainty, many of these stocks offer high returns in the range of 4%-6% as their share prices have plummeted. (Returns move inversely to prices.)

Trust Financial

(TFC), a major regional bank based in Charlotte, yielded 6.5%, compared to an average of 4.3% over the past 12 months. Minneapolis-based

US Bank Corp

(USB) is 5.4%, versus the annual average of just over 4%.

Key Corp

(KEY), headquartered in Cleveland, is at 7% – more than three percentage points above the average of 3.7%.

These banks have a lot of headwinds that will certainly make short-term dividend growth challenging. Example:

Bank of the First Republic

(FRC), which announced Thursday it will receive an infusion of $30 billion in uninsured deposits from a group of banks, said it has suspended its dividend.

Many banks will likely have to continue to raise the rates they pay on deposits to help stabilize their funding and avoid rapid withdrawals — a dynamic that contributed to the bankruptcy of Silicon Valley Bank.

signature bank

(SBNY), one of the relatively few banks doing business with cryptocurrency companies, also failed.

To maintain their finances, some banks may have to cut back on lending, putting pressure on revenues. “The best way to maintain liquidity or build liquidity is to slow down your lending,” said Dave Ellison, a portfolio manager at Hennessy Funds and a bank equity specialist. “Less money is going out the door.”

And if the economy continues to deteriorate, possibly into a recession, banks will likely need to bolster their credit reserves. All of these factors weigh on profits. That, in turn, will affect dividend growth.

Still: “I don’t think so [these banks] almost think they need to cut their dividends,” says Ellison. His sentiments were echoed by three other investment professionals with whom from Baron spoke for this column.

One of them, Anton Schutz, former manager of the

RMB Mendon financial services
fund (RMBKX), which focuses on small-cap issues, thinks a pause in share buybacks is a more likely scenario for regional banks. He does not foresee any dividend cuts.

David Katz, chief investment officer at Matrix Asset Advisors, expects “the best/strongest banks will continue to pay their dividends”. But the collapse of the Silicon Valley Bank could lead the Federal Reserve to limit payout increases this year.

Among the regional banking stocks favored by Katz are Truist Financial, U.S. Bancorp and

PNC financial services group

(PNC), yielding 4.8%.

Gerard Cassidy, a banking analyst at RBC Capital Markets, considers the outbursts of Silicon Valley Bank and Signature Bank to be outliers. “What caused the problem for these two banks was a funding problem,” he says. “The mix of deposits is important.”

In a research note, Cassidy writes that in the fourth quarter of last year, 93.8% of Signature Bank’s deposits were uninsured, meaning they exceeded the $250,000 in individual accounts covered by the Federal Deposit Insurance Corp. The count was 89.3% at Silicon Valley Bank’s parent,

SVB Financial Group

(SIVB) – the second highest tier among banking companies, followed by RBC Capital Markets.

In contrast, the ratio of uninsured deposits to total deposits was 57.2% at US Bancorp, 54.3% at Truist, 59.3% at KeyCorp, 52.7% at

M&T Bank

(

MTB

), and 54.5%

Fifth Third Bancorp

(FITB), according to RBC.

In response to the regional banking crisis, federal officials said Silicon Valley and Signature savers will be made healthy. On March 12, the Treasury, Federal Reserve and FDIC issued a statement saying that the Fed would make “additional funding available to eligible depositories to ensure that banks are able to meet the needs of all of their depositors.” to fulfil”.

Katz expects that banks will generally “do well and fully recover” and that their shares will eventually rise. But he warns that the risks have increased and the time frame for recovery has been extended.

Ellison expects banks to focus on improving their liquidity in the coming quarters, even at the cost of earnings.

Cassidy agrees that these banks are likely to be less profitable for a while, but he considers their dividends safe. He sees a very different situation this time than what happened 15 years ago during the financial crisis. In 2008-2009, a major credit crunch led to payouts. “We don’t have that this time,” he says.

At the time, many banks cut or suspended their dividends. In early 2009, for example, US Bancorp reduced its payout from 42.5 cents to one penny per share. KeyCorp halved its dividend to 18.75 cents in March 2008, then cut it two more times, finally to just one cent.

In a recent note, Cassidy said he expects “buying opportunities to emerge” after some near-term bumps in deposit outflows. He mentioned banks like Fifth Third Bancorp, which yielded 5.2%; KeyCorp; PCC; M&T, 4.2%; Truist; and US Bancorp.

While Cassidy doesn’t expect any of the larger regional banks he tracks to cut their dividends, a severe economic downturn would change his expectations. “If you’re going to tell me we’re going to have a recession this year with 10% unemployment, all bets are off,” he warns.

In short, investors should keep a close eye on regional bank news, even though most are unlikely to cut their dividends. Forewarned is forewarned, especially in times like these.

Write to Lawrence C. Strauss at [email protected]