Payout Cuts Unlikely at Regional Banks, Despite Market Jitters

Reflecting the uncertainty, many of these stocks sport high yields in the 4%-6% range because their share prices have plummeted. (Yields move inversely to prices.)

Truist Financial
(TFC), a large regional bank based in Charlotte, yields 6.5%, compared with an average of 4.3% over the past 12 months. Minneapolis-based
U.S. Bancorp
(USB) is at 5.4%, versus its one-year average of a little more than 4%.
KeyCorp
(KEY), headquartered in Cleveland, is at 7%—more than three percentage points above its average of 3.7%.

These banks face plenty of headwinds that certainly will make dividend growth challenging in the short run. Case in point:
First Republic Bank
(FRC), which announced Thursday that it will receive an infusion of $30 billion of uninsured deposits from a group of banks, said it has suspended its dividend.

Many banks are likely to have to keep raising the rates they pay on deposits to help stabilize their funding and prevent rapid withdrawals—a dynamic that contributed to the failure of Silicon Valley Bank.
Signature Bank
(SBNY), one of the relatively few banks that dealt with crytocurrency companies, also failed.

To shore up their finances, some banks might have to cut back on making loans, pressuring earnings. “The best way to preserve liquidity or build liquidity is to slow down your 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 deteriorates further, possibly into a recession, banks likely would have to bolster their loan-loss reserves. All of these factors will weigh on earnings. That, in turn, will affect dividend growth.

Still, “I don’t think [these banks] are anywhere close to thinking that they have to cut dividends,” says Ellison. His sentiments were echoed by three other investment professionals with whom Barron’s spoke for this column.

One of them, Anton Schutz, longtime manager of the
RMB Mendon Financial Services
fund (RMBKX), which focuses on small-cap issues, thinks a more likely scenario for regional banks is a pause in share buybacks. He doesn’t foresee dividend cuts.

David Katz, chief investment officer at Matrix Asset Advisors, expects “the best/strongest banks to continue to pay their dividends.” But Silicon Valley Bank’s collapse could lead the Federal Reserve to restrict payout increases this year.

Among the regional bank stocks Katz favors are Truist Financial, U.S. Bancorp, and
PNC Financial Services Group
(PNC), which yields 4.8%.

Gerard Cassidy, a bank analyst at RBC Capital Markets, views the Silicon Valley Bank and Signature Bank blowups as outliers. “What caused the problem for these two banks was a funding issue,” he says. “The mix of deposits is important.”

In a research note, Cassidy writes that in last year’s fourth quarter, 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. The tally was 89.3% at Silicon Valley Bank’s parent,
SVB Financial 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 U.S. Bancorp, 54.3% at Truist, 59.3% at KeyCorp, 52.7% at
M&T Bank
(
MTB
), and 54.5%
Fifth Third Bancorp
(FITB), according to RBC.

In response to the regional bank crisis, federal officials said that depositors at Silicon Valley and Signature will be made whole. On March 12, the Treasury, Federal Reserve, and FDIC issued a statement saying that the Fed would “make available additional funding to eligible depositary institutions to help assure banks have the ability to meet the needs of all of their depositors.”

Katz expects that banks overall “will do fine and fully recover” and that their stocks will eventually move higher. But he cautions that risks have risen and the time frame for recovery has become extended.

Ellison expects banks to emphasize improving their liquidity, even at the expense of earnings, over the next several quarters.

Cassidy agrees that these banks are likely to be less profitable for a time, but he considers their dividends secure. He sees a much different situation this time, versus what happened in the financial crisis 15 years ago. In 2008-09, a major credit crisis clobbered payouts. “We don’t have that this time,” he says.

Back then, plenty of banks cut or suspended their dividends. In early 2009, for example, U.S. Bancorp slashed its payout to a nickel a share from 42.5 cents. KeyCorp halved its dividend, to 18.75 cents, in March 2008, then trimmed it twice more, eventually down to just a penny.

In a recent note, Cassidy said he expects “buying opportunities will present themselves” after some near-term bumps on deposit outflows. He cited banks such as Fifth Third Bancorp, yielding 5.2%; KeyCorp; PNC; M&T, 4.2%; Truist; and U.S. Bancorp.

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

Bottom line: Investors must closely monitor news about the regional banks, even if 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