New Business January 20, 2010, 5:27PM EST

Everyone Wants a Piece of the Banks

Shareholders are clamoring for higher dividends. Borrowers want more loans. And the Obama Administration is trying to levy a new tax

By Peter Coy

Story Tools

http://images.businessweek.com/mz/10/05/370/1005_mz_12banks.jpg

Brian Stauffer

They say you can never be too rich or too thin. But too safe? Apparently that can be a problem. In an earnings call with analysts in January, JPMorgan Chase (JPM) CEO Jamie Dimon said that the way things are going now, many banks will be "overcapitalized" by mid- to late-2010. As banks have increased profits, or sold shares and hoarded cash on regulators' orders, their safety margins have substantially exceeded regulatory minimums. Now they are coming under pressure from various fronts to surrender some of that cushion—and shareholders, pushing for fatter dividends, may have the best chance of getting their hands on the money.

Overcapitalization may sound like a good problem to have, considering that only a year or so ago the federal government was racing to save the U.S. financial system from outright collapse. Surprisingly, though, having too much money can be almost as bothersome as not having enough. Pressures on Dimon and other bank CEOs are mounting from multiple directions: from shareholders who want bigger payouts; small businesses that say the banks should make more loans to revive the economy; employees who want bigger bonuses; and the Obama Administration, which wants to tax big banks to cover the government's $117 billion in projected losses from the bailout.

Of all the competing claims, shareholders' demands for higher dividends may be the most likely to succeed. JPMorgan Chase, regarded as the best managed of the large banks, will probably be the first to hike payments. In the call discussing the bank's $3.3 billion fourth-quarter profit, JPMorgan Chase reiterated plans to raise the annual dividend, now 20¢ a share, to 75¢ or $1 in the second half of this year, assuming the economy continues to recover and loan losses are in line with expectations. Says Matthew D. McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati: "If you can be the first bank to increase the dividend, that's going to make a statement to the investing public."

Shareholders can make a strong case for the money. The average dividend yield of big banks—that is, the dividend divided by the stock price—is at its lowest since 1997. Federal regulators understand that banks need to reward shareholders so they'll be willing to buy future issues and build up the companies' capital base. It's a fine line on how tough to get on limiting dividend hikes, says one federal regulator who asked not to be named, adding it's going to be challenging to get the balance right.

The financial institutions don't plan on emptying out their treasuries to pay for higher dividends. Dimon, for one, is intent on keeping JPMorgan Chase well-capitalized. He says regulatory minimums for capital are going to be raised in the next few years. "No one wants to be caught short in capital, particularly if someone is going to be punitive about it," Dimon told analysts. Higher payouts will come at a cost. Each dollar paid out in dividends is a dollar not available for fresh lending or covering surprise losses on loans.

An increase by JPMorgan Chase will pressure other banks to raise their dividends, even though their finances may not be as sturdy. While U.S. Bancorp (USB) and BB&T (BBT) may also hike their payouts this year, according to analyst Jason M. Goldberg of Barclays Capital (CS), Citigroup (C) and Bank of America (AC) probably won't be able to do so until at least 2011. (Spokesmen for Bank of America, Citigroup, and Wells Fargo (WFC) declined to comment on their plans.)

An abundance of capital by itself is no guarantee of health. By one measure, Citi's capital amounts to 11.7% of assets, more than JPMorgan Chase's 11.1% and well above the 6% regulatory minimum. But no one would argue that Citi is in good shape. It reported a $7.6 billion fourth-quarter loss this month, and CEO Vikram Pandit faces continued high default rates on his loan portfolio. (A spokesman for the Office of the Comptroller of the Currency says its examiners don't rely solely on banks' capital ratios to determine their soundness.) Before JPMorgan or any other bank boosts its dividend, it will have to get clearance from its overseers. Federal Reserve guidelines say regulators must consider "current and prospective earnings" as well as "prevailing market and economic conditions" when evaluating the request.