Bank Stress & Dividends

The Fed has announced its formal stress-testing policy, with a handy FAQ.

Q8: What will be the source of capital if supervisors determine that a banking organization requires an additional capital buffer?

A: An institution that requires additional capital will enter into a commitment to issue a CAP convertible preferred security to the U.S. Treasury in an amount sufficient to meet the capital requirement determined through the supervisory assessment. Each institution will be permitted up to six months to raise private capital in public markets to meet this requirement and would be able to cancel the capital commitment without penalty. The CAP convertible preferred securities will be converted into common equity shares on an as‐needed basis. Financial institutions that issued preferred capital under Treasury’s existing Capital Purchase Program (TARP 1) will have the option of redeeming those securities and replacing them with the new CAP convertible preferred securities.

Meanwhile, fresh from his claim that:

“They’re not going to cut the dividend at BMO,” I told Berman, with all the confidence that comes from having an RRSP that’s overweight oil and gas. “There’s no way any of these big banks chop the payout.”

See, I know my Canadian banking history. Only one domestic player has cut its common stock dividend in recent memory – National Bank, after taking a pasting on corporate loans. The bank spent years in the penalty box as a result. No board wants to join this hall of shame.

Andrew Willis has urged:

None of the five big banks have cut common share dividends since the Great Depression.

I don’t know if history will be made in this downturn.

But I do know that at least one blue-chip board – at Bank of Montreal – should cut the dividend in half.

I will forestall Assiduous Reader Norbert Schlenker and point out that Scotia chopped dividends in WW2.

Anyway, I mention this because ANZ Bank has cut its dividend and so have a lot of US Insurers. Precautionary common dividend cuts are becoming socially acceptable.

Will BMO or others cut their dividend? I’m dubious. They are, at least, still covering their dividend with earnings and while number two and three might come pretty quickly, I don’t think anybody wants to be number one in the line-up. But, frankly … I don’t care a lot! I’m a pref guy!

One Response to “Bank Stress & Dividends”

  1. scomac says:

    * Will BMO or others cut their dividend?

    Not only am I dubious, but IMHO it would be a very foolish and short-sighted move. Only now is the gaze of global financiers beginning to cast a glance at Canadian banks as the sole bastions of fiscal responsibility within a global system in crisis. Gov’t bail-outs; unnecessary. Dividend cuts; not needed. Raising capital; easy with a willing marketplace. At some point in the not-to-distant future, global investors will come calling much in the same way that they did at the height of the love affair with the Alberta Oil Sands.

    Could our banks get away with a dividend cut? Probably. At least a lot of market pundits are suggesting as much based on the recent experience of JP Morgan Chase in the US. But a dividend cut makes our banks rather indistinguishable from all those other banks around the globe that did the very same thing. Cut the dividend and forget about an inflow of foreign capital and what that would do for the currency of each of our banks when it comes to foreign acquisitions.

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