Dividends from regional banks look safe despite the panic

The collapse of Silicon Valley Bank triggered an earthquake that still reverberates in the regional banking landscape.


SPDR regional banks

The exchange-traded fund (ticker: KRE) has lost about a third of its value since March 8, when the bank’s liquidity problems surfaced publicly. The upheaval raises a key question for investors in regional bank stocks: How safe are their dividends, a key appeal of these stocks? Answer: safer than some fears.

Because of the uncertainty, many of these stocks are posting high yields in the 4% to 6% range as their share prices have fallen sharply. (Yields move inversely with prices.)

Trustworthy finances

(TFC), a major Charlotte-based regional bank, is yielding 6.5%, compared to a 4.3% trailing 12-month average. Based in Minneapolis

U.S. Bancorp

(USB) is up 5.4% versus its one-year moving average of just over 4%.


(KEY), headquartered in Cleveland, is up 7% — more than three percentage points above its average of 3.7%.

These banks face a lot of headwinds that will certainly make dividend growth challenging in the near term. case study:

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 had suspended its dividend.

Many banks will likely need to keep raising the interest rates they pay on deposits to stabilize their funding and prevent rapid withdrawals — a dynamic that contributed to Silicon Valley Bank’s failure.

signature bank

(SBNY), one of the relatively few banks to delve into cryptocurrency businesses, also failed.

To prop up their finances, some banks may have to cut lending, which depresses revenue. “The best way to maintain or build liquidity is to slow down lending,” says Dave Ellison, a portfolio manager at Hennessy Funds and a specialist in bank stocks. “There’s less money out the door.”

And if the economy continues to deteriorate, possibly into a recession, banks would likely need to build up their loan default reserves. All of these factors will weigh on the result. That, in turn, will affect dividend growth.

Still: “I don’t think so [these banks] almost think they need to cut dividends,” says Ellison. His opinion was shared with those of three other investment professionals Barrons spoke for this column.

One of them, Anton Schutz, longtime managing director of

RMB Mendon financial services

Fund (RMBKX), which focuses on small-cap issuance, thinks a pause in share buybacks is a more likely scenario for regional banks. He does not intend to cut dividends.

David Katz, Chief Investment Officer at Matrix Asset Advisors, expects “the best/strongest banks to continue paying their dividends.” But the collapse of the Silicon Valley bank could prompt the Federal Reserve to limit payout increases this year.

company / tickerCurrent pricedividend yieldMarket value (bn)Price change since March 8th*
Fifth Third Bancorp / FITB$25.415.2%$17.4-39.4%
KeyCorp / KEY11.757.010.9-47.5
M&T bench / MTB124.894.221.0-23.6
PNC Financial Services Group / PNC125.054.850.0-28.6
Truist Financial / TFC32.16.445.6-41.0
U.S. Bancorp / USB35.445.454.3-33.5

Note: Prices and price changes as of March 15; other data as of March 16. *On March 8, it was first publicly announced that SVB Financial Group had sold bonds from its portfolio at a loss.

Source: FactSet

Among the regional banking stocks Katz favors are Truist Financial, US Bancorp and

PNC Financial Services Group

(PNC), giving 4.8%.

Gerard Cassidy, banking analyst at RBC Capital Markets, sees the Silicon Valley Bank and Signature Bank explosions as outliers. “What caused the problem for these two banks was a funding problem,” he says. “The depot mix 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 were larger than the $250,000 in individual accounts covered by the Federal Deposit Insurance Corp. were covered. At Silicon Valley Bank, 89.3% were parent,

SVB Finance Group

(SIVB) – the second highest level 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 and 52.7% at

M&T Bank



) and 54.5%

Fifth Third Bancorp

(FITB), according to RBC.

In response to the regional banking crisis, federal officials said depositors in Silicon Valley and Signature are being healed. On March 12, the Treasury Department, the Federal Reserve and the FDIC issued a statement saying the Fed would “provide additional funding to eligible deposit-taking institutions to ensure the banks are able to meet the needs of all of their customers.” to meet depositors”.

Katz expects that banks overall will “do well and fully recover” and that their shares will eventually rise. However, he warns that risks have increased and the timeframe for recovery has lengthened.

Ellison expects banks to focus on improving their liquidity over the next few quarters, even at the expense of profits.

Cassidy agrees that these banks will likely be less profitable for a while, but he thinks their dividends are safe. He sees a completely different situation this time than in the financial crisis 15 years ago. In 2008-09, a major credit crunch affected payouts. “We didn’t have that this time,” he says.

Many banks cut or suspended their dividends at the time. For example, in early 2009, US Bancorp cut its payout from 42.5 cents to a nickel per share. KeyCorp halved its dividend to 18.75 cents in March 2008, then cut it twice more, finally to just one cent.

In a recent note, Cassidy said he expects “buying opportunities to arise” after some short-term bumps in deposit outflows. He cited banks like Fifth Third Bancorp with a 5.2% yield; KeyCorp; PNC; M&T, 4.2%; shop steward; and US Bancorp.

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

Bottom line: Investors need to keep a close eye on news about regional banks, even though most are unlikely to cut their dividends. Forewarned is forearmed, especially in times like these.

write to Lawrence C. Strauss at lawrence.strauss@barrons.com

Source : www.barrons.com

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