Will Banks Increase Dividends ?

With the Federal Reserve finally giving its consent for big banks to increase dividend payments, everyone is heaving a sigh of relief … well, almost everyone. The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns (Little Books. Big Profits) Credit rating agency Standard & Poor's seems to have different ideas. The immediate results With several big banks coming up with plans to raise their dividends and buy back stock, it seems that the financial crisis is firmly a thing of the past. Economic recovery aided by strong operating profits in the financial sector has no doubt helped the big banks pass the dividend stress tests. Let's put things into perspective. According to revisions in the GDP last week, the finance sector accounts for 30% of all fourth-quarter operating profits for 2010. Considering the recency of the financial crisis, this is definitely a positive thing for the banks, especially because this sector contributes less than 10% to the overall GDP. In absolute numbers, finance profits jumped to $426.5 billion. It's agreed that the financial sector led the way into the recession, but now the same sector is leading the way out. Shouldn't they now be entitled to return capital to shareholders? Not according to credit rating agency S&P. The reason: The economic crisis is not fully over and banks still don't have the balance sheet strength to afford returning capital to shareholders. The agency said that banks need an 8% risk-adjusted capital ratio to make sure that another financial crisis is avoided, and it argues that banks still fall short of the target on an average which read 7.6% at the end of 2010. The performance So how exactly are the banks placed? The big banks have definitely recovered. Let's have a look at their capital ratios individually. According to Basel III norms -- the new global standards set following the financial crisis for adequacy in bank capital requirements, liquidity, and leverage -- the minimum tier 1 capital ratio must be 6% and total capital ratio 8%. Bank of America's (NYSE: BAC ) tier 1 capital ratio stands at 11.2%, while the total capital ratio is 15.8%. This is not bad. However, the Fed recently blocked its move to increase dividends later this year.123... Read more