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« : March 06, 2013, 12:47:41 PM »

Stress Tests Seen Boosting U.S. Bank Shareholder Payouts
By Dakin Campbell and Hugh Son - Mar 6, 2013
The six largest U.S. banks may return almost $41 billion to investors in the next 12 months, the most since 2007, as regulators conclude firms have amassed enough capital to withstand another economic shock.

Lenders including Citigroup Inc. (C) and Bank of America Corp. (BAC) will buy back $26.4 billion in shares, up from $23.8 billion, according to the average estimate of three Wall Street analysts. An additional $14.5 billion will be paid in dividends, $3.4 billion more than 2012, separate estimates show. The payouts are contingent on approval by the Federal Reserve.

The central bank tomorrow will release preliminary results of its stress tests on the 18 largest U.S. lenders. Next week, it will tell banks whether they can increase their payouts.

“You’ve gone from a few years ago, when the industry as a whole didn’t have enough capital, to the point where in the not- too-distant future, it’s going to have too much,” Jason Goldberg, a New York-based banking analyst at Barclays Plc, said in a telephone interview. The Fed’s endorsement is “a Good Housekeeping seal of approval.”

Regulators are allowing payouts to climb to pre-crisis levels even as some analysts and investors question whether capital is high enough to prevent a future taxpayer rescue. Citigroup and Bank of America, each the recipient of a $45 billion bailout that has since been repaid, will have the biggest increase in returns, estimates show. Higher dividends may lift share prices, some of which still trade below book value, and offer a signal of bank-growth outlook.

The 24-company KBW Bank Index (BKX) rose 0.8 percent as of 11:20 a.m. in New York. Bank of America climbed 3.3 percent, Citigroup advanced 1 percent and JPMorgan increased 0.7 percent. Wells Fargo (WFC) & Co. added 0.3 percent.

Projected Payouts

The share-repurchase average was compiled from estimates provided by analysts at Credit Suisse Group AG (CSGN), Barclays and Morgan Stanley (MS) and includes projected buybacks through the March 2014 stress tests. The dividend increases were based on analysts’ estimates compiled by Bloomberg for the next four payouts and the number of shares outstanding for each of the banks at the end of December.

The higher projected payouts fall short of what they were before the crisis. The six biggest banks gave back $66.4 billion in 2007, before subprime-mortgage losses led to the collapse of Lehman Brothers Holdings Inc., according to data compiled by Bloomberg. Lenders paid $32.4 billion in dividends and repurchased $33.9 billion of shares that year, the data show.

CCAR Scenarios

The Fed began annual stress tests in 2009 to evaluate the health of the U.S. banking system. In 2011, the central bank adopted an approach known as Comprehensive Capital Analysis and Review, or CCAR, which focused on lenders’ capital plans, assessing how dividend or share-buyback increases would affect them. This year it’s also conducting a separate review, as mandated by the 2010 Dodd-Frank Act.

Under both tests, regulators subject banks’ portfolios, capital levels and profit-making potential to conditions that simulate an economic recession or financial shock.

The 2013 stress tests involve two scenarios. In one, the economy contracts for six quarters and inflation and interest rates rise sharply; in the other, unemployment climbs above 12 percent and stocks fall 52 percent. Last year’s test assumed an unemployment rate of 13 percent.

This year’s CCAR for the first time provides banks an early look at how they performed under the analysis, giving them a chance to revise their plans. If their capital can withstand those conditions without pushing ratios below regulatory levels, and if their analysis is rigorous enough, the Fed signs off.

Second Chance

Giving banks a second chance and using less severe assumptions will lead to higher capital returns and a better pass rate than last year, when 15 out of 19 lenders met targets, Bloomberg Industries analysts wrote in a March 1 report.

The results of the test mandated by Dodd-Frank will be announced tomorrow. While that review uses the same CCAR scenarios, the results assume no changes to lenders’ dividends and a halt in stock buybacks.

Citigroup, the third-biggest U.S. bank, will raise its quarterly dividend to 7 cents a share in May, according to analysts’ estimates compiled by Bloomberg. The New York-based lender has paid shareholders a 1-cent quarterly dividend since 2011, after then-Chief Executive Officer Vikram Pandit scrapped the payout during the financial crisis.

Pandit failed to get permission from the Fed to increase rewards for shareholders last year, which contributed to the bank’s directors ousting him in October, a person familiar with the matter said at the time.

Citigroup Repurchases

His replacement, Michael Corbat, 52, is seeking to avoid a repeat of last year and probably didn’t ask for a substantial increase, according to analysts including Sanford C. Bernstein & Co.’s John McDonald. He has predicted no change in dividends and a “symbolic” amount of share repurchases, while Fred Cannon, an analyst at KBW Inc., estimated no buybacks and a quarterly dividend boost to 5 cents.

Citigroup will distribute $1.06 billion in dividends over the next four payouts and repurchase $1.17 billion of shares through March 2014, estimates show. That compares with $117.2 million in dividends and no buybacks last year, according to data compiled by Bloomberg.

“Citi management has been pretty clear that they aren’t going to ask for much of anything,” said Cannon, who has an outperform rating on the bank’s shares. “Their goal for this year is to have their plan accepted by the Fed.”

Moynihan Rejection

Bank of America CEO Brian T. Moynihan has expressed confidence that his company will pass the stress tests and be able to increase the Charlotte, North Carolina-based firm’s 1- cent dividend. Moynihan, 53, raised expectations of a dividend increase in 2011, only to have them dashed by regulators. The lender had its capital plan approved last year after leaving its payout unchanged.

The bank will give shareholders $1.4 billion in dividends and repurchase $1.7 billion of stock, estimates show, a combined 151 percent increase over last year’s $1.24 billion in payouts and buybacks.

Bank of America, which has spent more than $45 billion to settle disputes tied to defective mortgages, may need as much $20 billion more in reserves for repurchasing loans, Michael Mayo, a CLSA Ltd. analyst, said in a Feb. 25 note. The lender has a May 30 court hearing to approve an $8.5 billion settlement of claims from investors. Mortgage expenses may rise if that deal is scuttled, the bank said last week in a filing.

JPMorgan Payout

JPMorgan’s projected payout, while the most among the six banks at $15.3 billion, would drop 19 percent from last year’s $18.8 billion. Fed officials forced the New York-based lender to suspend a $15 billion buyback program last year after it disclosed losses on derivatives bets that swelled to more than $6.2 billion. JPMorgan asked the Fed if it could buy back less than $3 billion in shares a quarter this year, CEO Jamie Dimon told analysts on a Jan. 16 conference call.

The bank, the largest in the U.S., will return $5.58 billion through dividends and $9.67 billion through share repurchases in the next 12 months, estimates show. It’s projected to raise the quarterly dividend to 36 cents next month from 30 cents, according to data compiled by Bloomberg.

Dimon, 56, has said banks soon will have more capital than they know what to do with. Lenders with $10 billion or more in assets had a ratio of equity to assets of 11.35 at the end of September, the highest since at least 1984, according to Federal Deposit Insurance Corp. data. The ratio declined to 11.11 at the end of December.

“I don’t think it’s just JPMorgan,” Dimon said at a Feb. 26 investor conference. “I think all banks will have too much capital in 2 1/2 years. And they’re not going to know what to do with it.”

Absorbing Losses

Others including FDIC Vice Chairman Thomas Hoenig and Stanford University finance professor Anat Admati have called for banks to hold higher levels of equity. Admati, in a new book written with Martin Hellwig called “The Bankers’ New Clothes,” said lenders shouldn’t be returning capital through share buybacks and dividends, at least not until they have built up much larger cushions.

“They should be able to absorb more losses,” Admati said in a phone interview. “The banks benefit from a safety net, and that gives them incentives to take too much risk with depositors’ money. If they bore more of the losses on their own, with equity, I wouldn’t mind as much the risks they take.”

Wells Fargo, the fourth-largest U.S. bank and biggest home lender, will pay out $5.51 billion in dividends and buy back $7.95 billion of shares, according to estimates.

Raising Dividends

Chief Financial Officer Timothy J. Sloan said the San Francisco-based lender’s 2013 capital plan proposed higher distributions than last year, when the bank bought back more than $3.8 billion of shares and increased its annual dividend to 88 cents a share from 48 cents. The bank raised its quarterly dividend by 3 cents in January.

“It’s very important in this environment to continue to increase the amount of capital distribution that we are providing to our shareholders,” Sloan said at a Feb. 13 investor conference in Miami.

Morgan Stanley CFO Ruth Porat said in January that her New York-based firm only requested approval for buying the remaining 35 percent of its brokerage venture from Citigroup. The purchase will cost $4.7 billion, and the increased stake will require $400 million of incremental capital, Morgan Stanley said.

Goldman Sachs Group Inc. (GS) probably will use $5.9 billion for buybacks and $935 million to pay dividends this year, according to the estimates.

Buyback Plans

“You should expect going forward that much more of our capital planning will be around buybacks,” David Viniar, then- CFO of New York-based Goldman Sachs, said on an Oct. 16 call. “Not to say we won’t increase dividends again, but the big portion of our capital planning will be around buybacks.”

Spokesmen for the six banks declined to comment.

Distributions by the banks may be tempered by past failures and a desire among management teams to appease regulators and eliminate surprises, analysts and investors said.

“No one will get overly aggressive with capital returns because they don’t want to get in trouble with the regulators,” said Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages about $830 million. “That’s the new reality.”

In addition to the broader test, the six largest banks will have their trading operations subjected to a market shock. That may limit how much capital they can return, Betsy Graseck, a Morgan Stanley analyst, wrote in a March 1 report. The tests could shave 0.8 percentage point to 2.7 percentage points off capital ratios, with Bank of America least affected and Goldman Sachs the most, Graseck wrote.

‘Tough Times’

As banks continue to recover from the financial crisis, investors will be focused on dividends, in part because of what they say about a company’s outlook, said Ralph Cole, a senior vice president of research at Portland, Oregon-based Ferguson Wellman Inc., which manages $3.1 billion, including Wells Fargo and Citigroup shares.

Dividends are “the No. 1 thing we would like to see because it would show some confidence in the future,” Cole said in a phone interview. “For a lot of share buybacks, we know how optional those can be in tough times.”

Even so, for banks trading at less than book value, buying back stock is the smartest move, said Cole. He said his firm’s investment in Citigroup is based on that expectation. Managers including Dimon and Berkshire Hathaway Inc. (BRK/B) Chairman and CEO Warren Buffett also have said they like to buy back shares when the price falls below some measure of intrinsic value.

Berkshire Benefit

Citigroup shares trade at 85 percent of tangible book value, a measure of what the company would be worth if liquidated. Bank of America trades at 88 percent, while Morgan Stanley’s stock price is 89 percent. Goldman Sachs, JPMorgan and Wells Fargo all trade above book value.

Berkshire is Wells Fargo’s largest stockholder and also owns shares of Minneapolis-based U.S. Bancorp, the seventh- biggest U.S. lender. A 1-cent increase in Wells Fargo’s quarterly dividend could mean about $17.6 million a year for Omaha, Nebraska-based Berkshire. The company, an owner of railroad, energy and insurance units, owns preferred shares in Bank of America and warrants to purchase Goldman Sachs stock.

Increasing capital returns also may help the retirement and pension plans of state and municipal workers and teachers. New York-based TIAA-CREF, which oversees $495 billion in assets for 3.7 million retirees, many of them in government and education, is at least the 27th-largest investor in Wells Fargo, JPMorgan, Citigroup and Bank of America, data compiled by Bloomberg show.

Payouts are “clearly headed in the right direction,” Barclays’s Goldberg said. “It shows the industry is back on solid ground.”

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; David Scheer at dscheer@bloomberg.net


A load of crapola imvho

\"A Great Coach has to have a Patient Wife, A Loyal Dog, and a Great Quarterback. . . . but not necessarily in that order\" ~ Coach Bud Grant

John Galt?

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« #1 : March 06, 2013, 02:45:46 PM »

Don't know what that has to do with QE2 unless all those bank execs are going on a company paid retreat aboard the British luxury liner.

I'd say this news has more to do with TARP than any of the QEs. In TARP, the FED bought securities and mortgages directly from the banks. QE was the FED buying Treasury securities in the open secondary market. With a QE the FOMC has no idea who it is buying these securities from so it could just as easily have been giving China more liquidity as anyone else.

I would say this does mean that for the most part TARP did work and now most of the bailout money has been repaid. I was vehemently against TARP, but now the evidence suggests I fry up some crow.

QE2 (and 3) IMO did little to stimulate the economy. It just enabled the govt. to overspend a little longer without the risk of a bond market collapse and soaring Interest rates (though that risk is still there). The biggest result of QE2 was now the FED has that much more Treasury securities that it will have to sell at some point in the future


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« #2 : March 06, 2013, 07:13:29 PM »

Was thinking - aside from the cruise - that continued reduction of borrowing costs, increase in money supply would be leading to profitability.

\"A Great Coach has to have a Patient Wife, A Loyal Dog, and a Great Quarterback. . . . but not necessarily in that order\" ~ Coach Bud Grant

John Galt?

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Posts : 18831
« #3 : March 07, 2013, 12:46:09 PM »

Was thinking - aside from the cruise - that continued reduction of borrowing costs, increase in money supply would be leading to profitability.

QE2 and 3 didn't really reduce borrowing costs because they were already near zero. Besides Banks borrow from the Fed Funds window and the FED can lower those rates directly w/o buying T-notes/T-Bonds. And the increase in money supply doesn't help an individual bank unless their balance sheet is healthy enough to take advantage. Again this is where TARP came in, the direct purchase of illiquid assets for cash almost immediately turned around these banks' balance sheets

What is really driving banks now is new revenue sources and lower costs thru technology. In the last 6 yrs, debt cards and hybrid debt/secured-credit card usage has exploded and the Banks get $0.22 plus a % on EVERY transaction. Bank of America gets over $4 billion/yr in debit and Credit card IC fees (and this doesn't include interest on CCs with a outstanding balance). Also banks are cutting Waaay back on the number of live tellers. The new ATMs eliminate the need to wait on a teller to make deposits or cash paychecks and now more banks are going to "virtual tellers" where you talk to someone via a TV screen (very Star Trek-ey) so instead of 5-8 tellers at each branch, they can now have a single teller room that can service hundreds of branches.

Another change is many banks are now owning the real estate and buildings for their branches. By eliminating leased properties (leases are a balance sheet liability that hurts net cap ratios) for wholly owned properties, they exchange liabilities for revenue producing assets by using only part of the property for a branch and leasing the rest out to other tenants. According to a source I know personally, BofA is planning 550+ new branches at wholly owned sites (and closing about 400 leased sites) in the next yr. And BB&T is planning 260 new "owned" sites while closing 180 leased sites.

So I'd say most of the rebound and strength in the Big banks is NOT the result of some govt. scheme or FED policy but is the result of new technology and entrepreneurial and innovative thinking on their part (but DON"T tell CBW that or he will go on a 5-page rant on how "they didn't build that", the govt. did) .


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« #4 : March 07, 2013, 06:28:57 PM »

Your secret is safe with me..

Saw this today.  Seems odd

Holder: Big banks' size complicates prosecution efforts - The Hill's On The Money   3/7/13 6:23 PM

By Peter Schroeder - 03/06/13 02:00 PM ET Attorney General Eric Holder suggested Wednesday that some financial institutions have become too large
and are escaping full-fledged prosecution as a result.

Testifying before the Senate Judiciary Committee, Holder told lawmakers that he is concerned that some institutions have become so massive and influential that bringing criminal charges against them could imperil the financial system and the broader economy. His remarks come as a growing number of lawmakers have suggested that big banks are, effectively, "too big to jail."
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy," he said. "And I think that is a function of the fact that some of these institutions have become too large."

He suggested that prior attempts to bring enforcement against banks may have been stifled by their outsize influence, saying it has an "inhibiting influence ... on our ability to bring resolutions that I think would be more appropriate."

The Justice Department is required to consider the economic impact of its actions, but Holder's comments should bolster an increasingly vocal group of lawmakers that argue the nation's biggest banks have gotten too large and need to be curbed.

Sens. Chuck Grassley (R-Iowa) and Sherrod Brown (D-Ohio) pressed Holder on the issue in a letter sent in February, airing their disappointment that no major criminal charges had been filed against banks or their employees in the wake of the financial crisis. And Sen. Elizabeth Warren (D-Mass.) drew headlines when she blasted financial regulators during a separate hearing for failing to bring any major financial institutions to trial since the meltdown.

Grassley pressed Holder again on the issue during testimony Wednesday, at which point Holder said he essentially agreed.
"The concern that you have raised is one that I, frankly, share," he said, adding that ultimately the best deterrent would be if they could bring charges against individuals instead of companies.
However, he also added that all of the bad behavior on Wall Street leading up to the crisis may not necessarily have been criminal and that his criminal team has been "as aggressive as they could be."
Holder touted the Justice Department's efforts on financial fraud, specifically noting the government's civil suit against the credit rating agency Standard & Poor's, in which the government is seeking at least $5 billion in damages. The rater has said the lawsuit is without merit and is challenging it.

Oh yea, I had an error in QE2, as you noted should have been QE3
« : March 08, 2013, 12:02:42 AM dbucfan »

\"A Great Coach has to have a Patient Wife, A Loyal Dog, and a Great Quarterback. . . . but not necessarily in that order\" ~ Coach Bud Grant
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