Despite recent fire-sale yields of 9% for several regional bank stocks, the group’s dividend prospects look stable.
Amid concerns about further contagion in the sector, their shares have fluctuated up one day and down the next.
One of the latest concerns: PacWest Bancorp (ticker: PACW ) cut its quarterly dividend from 25 cents to a penny per share.
Paul Taylor, CEO of the Beverly Hills-based bank, said in a statement Friday that the cut was “a prudent move to accelerate our plans to build capital.”
The bank’s stock fell on May 4 following a report that PacWest was exploring strategic options, including a possible sale. After falling 50.8% that day, it recovered 82% on May 5.
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The stock gained another 3% on May 8.
Shares of other regional banks have not been as volatile since the Silicon Valley bank went belly-up in March, even as concerns about the stability of their deposits dragged down these institutions.
Bank stocks took another big hit last week when the SPDR Regional Bank Exchange-Traded Fund (KRE) lost 10% of its value.
On May 4, shares of Zions Bancorporation ( ZION ), a regional bank based in Salt Lake City, gained 8.6%. Dallas-based Comerica ( CMA ), 9%, and KeyCorp
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(KEY) was 9.2%. KeyCorp is based in Cleveland.
All of those dividend yields have fallen slightly as stocks have recovered some ground.
Analysts polled by FactSet expect KeyCorp to pay a dividend this year of 83 cents per share on estimated earnings of $1.60, a payout ratio of just over 50%. For Zions Bancorp, that’s $1.68 per share on estimated earnings of $5.22. Comerica had $2.86 per share on estimated earnings of $8.16
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According to Eric Compton, who covers big banks for Morningstar, all three banks rely more on net-interest income than fees compared to their peers.
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As interest rates rise, banks face higher deposit costs—which puts more pressure on their net interest income.
Compton, however, doesn’t expect any of those three banks to cut their dividends.
Meanwhile, PacWest’s recent dividend cut bucks the growing trend for the group.
First Republic Bank
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Not a pure regional bank focused on wealth management, it suspended its dividend in early April amid large deposit outflows. The bank was acquired by JPMorgan Chase (JPM) on May 1.
A note from RBC Capital Markets on Monday said, “Despite a fresh round of problems with regional banks last week, the KBW Nasdaq Bank Index continues to show signs of stability.”
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Most of the big regional banks kept their dividends intact in the first quarter.
“None of the banks I cover except First Republic are in serious trouble,” says Morningstar’s Compton.
Regional banks he covers include M&T Bank (MTB), US Bancorp US Bancorp (USB), Regions Financial (RF) and PNC Financial Services Group.
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(PNC).
How dividends play out for regional banks throughout the year will depend on the health of the economy. If credit growth picks up and banks need to add more capital to their reserves to cover loan losses, that could put pressure on dividend payouts.
Compton expects regional banks to maintain their dividends. But he sees those banks becoming more conservative when it comes to dividend increases or aggressive stock buybacks.
There should still be yield in regional bank stocks, but investors should be wary of high volatility.
Lawrence C. at [email protected] Write to Strauss
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