Blocked BofA dividend at least shows fed using teeth

March 23, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Antony Currie
The Federal Reserve was right to block Bank of America’s plan to increase its dividend later this year. After all, the Charlotte-based bank remains deep in recovery mode. But nor is the regulator turning a deaf ear to BofA’s progress — it’s allowing the bank to submit a revised plan for an increased payout and other capital-related moves. It all makes it look as though the Fed is on top of keeping banks’ balance sheets healthy. But the U.S. central bank should still reveal more about its rationale.

The basics are straightforward. BofA lost money last year and is still taking hits from troublesome mortgage assets. Even Chief Executive Brian Moynihan doesn’t expect most of the bank’s businesses to return to normal until next year at the earliest. On top of that, the bank has a history of handing out whopping dividends. In 2007, they reached 71 percent of net income, double what most banks target. Former boss Ken Lewis had also been dipping into capital to pay for acquisitions like LaSalle Bank and Countrywide.

Moynihan has promised to make no more major acquisitions for at least four years and pledged more prudence in managing the bank’s capital. But he’s also talking up the bank’s ability to generate up to $30 billion in excess capital by the end of 2014. That may be possible — a BofA firing on all cylinders would have formidable earnings power.

The bank is not there yet. And the Fed deserves credit for reminding the bank’s executives and directors of that. But it’s not clear whether the Fed is worried about BofA’s core earnings falling short or about potential losses being higher than the bank projected, to pick a couple of possible concerns.

Of course the Fed may simply be making a show of saying “no” to somebody. Assuming BofA wanted to hike its dividend to 5 cents a quarter, as some analysts expected, the total payout would have been about $2 billion a year. The bank was already paying out 1 cent a quarter; split the difference, and a 3 cent quarterly dividend would boost capital by less than $1 billion a year compared with the 5 cent level.

That’s not nothing, but for a company with Tier 1 common equity of $125 billion, it’s surely not enough to have a big impact on its soundness. Greater transparency from the Fed would help clear up the reasoning.

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[…] Antony Currie wants a bit more clarity on why the Federal Reserve seems to be happy with Bank of America paying a dividend of 1 cent per quarter, but unhappy with a dividend of 5 cents per quarter. “It’s not clear,” he writes, “whether the Fed is worried about BofA’s core earnings falling short or about potential losses being higher than the bank projected, to pick a couple of possible concerns.” […]

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