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Some of the largest US banks intend to raise dividend payments after the Federal Reserve board completes its latest stress tests on their financial health, with Bank of America a notable absentee from the optimism expressed by its peers.
At a Goldman Sachs conference, the chief executives of Wells Fargo and PNC said they expect the Fed to allow them to increase their pay-outs to shareholders next year in spite of a tougher hurdle. “Our shareholders have been very patient with us,” said John Stumpf of Wells.
The Fed launched its latest round of stress tests last month, forcing banks to assess how their balance sheet would perform against a scenario in which the eurozone was plunged into a severe recession and the US economy worsened.
Only institutions able to demonstrate that their core capital would remain above 5 per cent of risk-weighted assets under the stress scenario will be considered for a dividend increase, the Fed has said.
Brian Moynihan, chief executive of BofA, steered clear of expressing any hope for a dividend increase, a year after he pledged to increase the bank’s pay-out only to be rebuffed by the Fed. “I’ve said we are not going to ask for a dividend until I’m sure we’ve got the capital picture solved along any dimension and that we can get approval,” he said.
Last year, at the same conference, Mr Moynihan was asked whether he expected to increase the dividend. “I don’t see anything that would stop us from not being successful on that front,” he replied. “And we’re going to do it as fast as we can.”
BofA has been shrinking the size of its balance sheet in an effort to meet more strenuous international capital targets. One option growing in popularity among lenders is to “optimise” their balance sheets, whereby banks reduce the size of their risk-weighted assets by tinkering with how they classify certain assets as a stealth means of improving a bank’s capital position.
“We are still 61 per cent [risk-weighted assets] to total assets,” Mr Moynihan said, referring to BofA’s ratio.
“And other people run 50-ish, so we still have optimisation to go. And, as we move to Basel III, you will see that optimisation go on,” he added.
The lender also is heavily exposed to mortgage losses and litigation stemming from its disastrous 2008 acquisition of Countrywide, the mortgage originator, which lent aggressively to subprime borrowers, many of whom later defaulted.
On Tuesday, BofA agreed to pay $315m to investors in mortgage securities who said they had been misled about the health of the underlying mortgages. The settlement with the Public Employees’ Retirement System of Mississippi pension fund has to be approved by Jed Rakoff, the judge who struck down a $285m settlement between Citigroup and the Securities and Exchange Commission.
At the Goldman conference, Mr Moynihan again refused to rule out a bankruptcy for Countrywide – a potential means to escaping litigation and losses related to its mortgages – but said: “We’ve got to move through this in a way that doesn’t disrupt the company.” People familiar with the situation say the bank all but discarded the bankruptcy option earlier this year on legal advice and is pursuing settlements to extricate itself from the mortgage hangover.
Separately, BofA said that the performance of its investment bank had improved. “We’ve seen better results so far in the fourth quarter and we’ll see how we finish the year,” said Mr Moynihan.
Jim Rohr, chief executive of PNC, who said he hoped to increase the dividend pay-out, questioned the amount of data the Fed should be releasing publicly. The Fed has committed to publishing bank-by-bank data this year compared with the general results of last year. “I would wait and see what the stress test [result] looks like before I decided exactly what level of detail I would go into,” he said.