Fed’s Clash With Bank of America Raises Questions

Brian T. Moynihan, Bank of America's chief executive.Jessica Rinaldi/Reuters Brian T. Moynihan, Bank of America’s chief executive.

This month, Bank of America gathered hundreds of investors and analysts in an ornate ballroom at the Plaza Hotel for the Wall Street equivalent of a coming-out party — with executives talking up a dividend increase and declaring that a “new era” for the company had begun.

There was just one problem: the Federal Reserve was not on board.

On Wednesday, Bank of America said the Fed had vetoed its plans for a modest dividend increase in the second half of 2011.

It is a serious setback for a company that has been struggling to win back the confidence of shareholders.

A handful of other large banks have also encountered resistance from regulators about their plans to increase payouts to investors or buy back stock, according to industry insiders who insisted on anonymity because they were not authorized to speak publicly.

Capital One Financial, MetLife and Morgan Stanley, along with Bank of America, have been notably absent from the list of peers that have announced dividend increases or share repurchases since last Friday, when the Fed informed the country’s 19 largest banks of the results of a second round of stress tests they underwent earlier this year.

For investors, the silence is somewhat unnerving. Bank of America did not disclose the central bank’s reason for rejecting the dividend proposal, and the Fed declined to comment on how individual institutions fared in its latest round of examinations.

Analysts said the rejection raised questions about the lingering problems faced by the nation’s biggest bank. Shares of Bank of America fell 1.66 percent on a day when the market edged higher.

Morgan Stanley declined to comment on the matter beyond a statement it had previously issued about the stress tests, which emphasized that the firm’s priority is to reinvest capital in existing businesses.

MetLife also did not comment on what it had been told by the Fed, but said it was “premature” to address the dividend issue because it typically increases dividends later in the year.

Capital One would not comment on discussions with regulators.

Analysts said the Fed’s concerns about Bank of America probably centered on its giant mortgage business, which is plagued by uncertainty because of institutional investors who want it to repurchase billions of dollars in soured mortgage securities.

In addition, the bank is under investigation by state attorneys general, which could force Bank of America and other large mortgage servicers to make a multibillion-dollar settlement.

“Nobody can really calculate” the risk Bank of America faces on the mortgage claims, said Chris Kotowski, a bank analyst with Oppenheimer, adding that it is “uncharted territory.”

Bank of America said it had originally submitted its dividend proposal to the Fed in January. The company’s plan was to maintain its current payout of one cent for the first two quarters of this year, and then institute a “modest increase” later this year, according to the regulatory filing on Wednesday.

Analysts originally expected the bank to raise its quarterly dividend to about a nickel — roughly 20 percent of its anticipated earnings for the remainder of 2011. That would be in line with other bank payout plans, which regulators are aiming to cap at 30 percent of earnings.

Despite the setback Wednesday, Bank of America said it intended to submit a revamped dividend proposal to the Fed.

“The corporation will continue to work with the Federal Reserve and intends to seek permission for a modest increase in its common dividend for the second half of 2011, through the submission of a revised comprehensive capital plan to the Federal Reserve,” the bank said in the filing.

Even so, analysts say that the rejection raises serious concerns about the bank’s leadership team, including its chief executive, Brian T. Moynihan.

Andrew Marquardt, a research analyst at Evercore Partners, called it a “frustrating and disappointing” setback.

“They are in this long haul of trying to rebuild credibility and confidence from investors and analysts alike,” he said. “This doesn’t help.”

Indeed, Bank of America’s failure to get the dividend increase proposal approved by the Federal Reserve stands in sharp contrast to other financial giants. Even Citigroup managed to get the Fed’s permission for a quarterly dividend payout, albeit a mere penny.

Bank of America “is financially stable enough to pay a dividend, but clearly you can’t put them on the same footing as JPMorgan or Goldman Sachs,” said Mr. Kotowski, of Oppenheimer.

The bank’s capital levels, although relatively strong, lag behind some competitors, according to Jefferson Harralson, an analyst at Keefe, Bruyette & Woods. “It makes sense to be a little more careful,” he said.

Capital One Financial’s public statement following the stress tests raised similar concerns. Although it had never indicated its capital plans, the bank stunned many investors when it said it expected to maintain its quarterly dividend at 5 cents, and unlike its peers, did not mention whether the Fed had granted it approval to return capital to shareholders in the future.

Many investors believe the company is financially strong, but some analysts said the Fed might have wanted more time to assess its condition once new accounting rules requiring it to bring billions of dollars of credit card-related securities onto its balance sheet go into effect later this year. In addition, the bank has acknowledged concerns over the application of certain tax benefits.

Asked if Capital One had submitted a dividend or share buy back request to the Fed, or if the Fed had rejected its plan, Tatiana Stead, a bank spokesman, demurred. “As a matter of policy, we will not disclose supervisory conversations or the nature of these supervisory interactions,” she said.

Capital One, she added, expected that its strong capital levels would support growth and “be available for increased deployment in the interest of shareholders.”

In January, federal regulators asked the nation’s 19 largest banks to provide detailed plans of how they would deploy their capital over the next two years — including any dividend increases or stock repurchase programs. Then, they tested their ability to cope with losses from a range of economic and financial situations.

Regions Financial and SunTrust Banks did not submit a dividend or stock repurchase request to the Fed. Those lenders were barred from doing so because they had not repaid the federal bailout money they accepted during the financial crisis.

Ally Financial, formerly known as GMAC, said its plans were still under review by the Fed, and as a private company, does not face the same pressures as publicly traded lenders.

Fed officials told the banks they could not return more than 50 percent of earnings to shareholders, and specifically limited dividend payouts to no more than 30 percent of earnings. But regulators declined to tell them the specific amounts they would approve; instead, they would only approve or reject the banks’ proposals, giving them the opportunity to resubmit them in future quarters.

Susanne Craig contributed reporting.


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