Bank stocks yielding close to 10 percent might tempt investors in a market where such income is rare, but the payouts are likely to plummet if not disappear. While yields on many bonds, especially those issued by the US Treasury, are approaching zero, regional banks like Marshall & Ilsley Corp and SunTrust Banks Inc have payouts of 9.96 and 7.6 percent, respectively.
But the yields are under pressure as banks grapple with a growing recession and a severe downturn in the residential and commercial real estate markets and come under increasing pressure to seek government bailout money for lending.
Many US banks are poised to slash their common stock dividends next year. In some cases, dividends could even drop to zero, analysts said.
The pain will likely be widespread. Regional banks Regions Financial Corp and SunTrust Banks Inc are likely to have dividends that exceed their net income next quarter, making dividend cuts almost a certainty, Scott Valentin, analyst at Friedman, Billings, Ramsey, wrote in a research note.
Earlier this month, Fox-Pitt Kelton said a dividend cut was imminent at Marshall & Ilsley, given its out-sized exposure to residential construction and home equity loans.
It may make sense for regulators to press banks to stop paying dividends entirely, Valentin wrote. "We would favour a national bank dividend holiday for the next two to three years," he wrote. With taxpayers now providing key support to many banks under the government's $700 billion Troubled Assets Relief Program, cutting dividends may be a political necessity.
"If you took taxpayer money, and you didn't even earn your dividend, to be using taxpayer money to pay your dividend would look really bad politically," said Tanya Azarchs, an analyst at Standard & Poor's.
Citigroup Inc agreed in November to cut its quarterly dividend to a penny a share after receiving $20 billion from the US government. At the beginning of 2008, the bank paid a dividend of 54 cents a share per quarter.
Other major banks are slashing dividends. Bank of America Corp cut its payout by 50 percent in October. Last month, UBS estimated the bank would slash it again to boost its shares and preserve capital.
Regional banks are not immune. Last week, Fifth Third Bancorp trimmed its common stock dividend. On December 23, Washington Federal Inc cut its quarterly dividend by 76 percent, while Horizon Financial Corp suspended its dividend. The list goes on.
"Regional banks tend to follow one another. My guess is you would see a whole bunch of regional banks cutting dividends early in '09," said Mark Fitzgibbon, an analyst at Sandler O'Neill. "I would look at markets where we have the most difficult economic issues, like Southern California, like South Florida, the Upper Northeast region, the Michigan area."
Spokespeople from Regions, Marshall & Ilsley, Bank of America, and SunTrust Bank all declined to comment.
Financial institutions globally are estimated to have suffered $1 trillion in writedowns and credit losses since the credit crisis began. Barclays Capital analyst Jason Goldberg estimated banks' loan losses would keep mounting in 2009 and would not peak until late next year or, more likely, the first half of 2010. This would force banks to set aside more money to cover those losses.
FBR analyst Valentin said, "So far the damage has been in construction and residential mortgage, or even capital markets. We think in 2009, it's going to be in commercial real estate, commercial and industrial loans, and consumer loans. "This recession will be long and probably deep."
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