New Round of Payout Cuts Seen; First Chicago May Lead the Way
Rumblings about bank dividend reductions have resumed after a brief hiatus, and analysts believe that First Chicago and several other large banks could be sitting ducks.
Although cuts would help these banks conserve capital, they also might deepen the postrally malaise that has settled over banking stocks following announcements of unexpectedly large loan-loss provisions at Wells Fargo & Co. and Security Pacific Corp.
High Payout Ratio
First Chicago Corp.'s directors will meet Friday. Though a spokeswoman would not comment on prospects for a dividend cut, it would be hard for the board to ignore the fact that First Chicago is currently distributing 67% of expected 1992 earnings - the highest payout ratio among major banks.
"We still think a dividend cut is forthcoming at First Chicago," said bank analyst James M. Rosenberg of Lehman Brothers Inc., one of the industry analysts who has predicted since last summer that First Chicago would have to fall in step with other money-center banks.
But Mr. Rosenberg does not expect the Chicago superregional's stock price to suffer - because it already reflects the expected dividend cut. Shares changed hands at $22.75 on Wednesday. The analyst is still urging shareholders to buy stock since "earnings prospects are in the process of turning around."
Meanwhile, other banks also look vulnerable.
Citicorp Could Be Due
Citicorp is a prime candidate, by some accounts. The bank's payout ratio is the second highest among major banks, at 65%, despite a slash six months ago to $1 per share from $1.78.
Another round of trimming may be forthcoming from both Chase Manhattan Corp., whose payout ratio is 40% of its forecast 1992 earnings, and at Chicago's Continental Bank Corp., where the payout ratio is 50%.
Mr. Rosenberg said he could offer no firm estimate right now on the payout ratio next year for First Interstate Bancorp.
Merger Implications
The payout ratio of C&S/Sovran Corp. will be on the agenda when the board meets next week in Richmond. A conclusion about the dividend is likely to affect the course of a merger with NCNB Corp., which hinges in part on the resulting dividend to C&S/Sovran shareholders.
The proposed exchange of 0.75 NCNB share for each share of C&S/Sovran would slash the dividend that C&S shareholders currently receive.
As a rule, investors and analysts expect dividends to equal about a third of earnings. Higher ratios may signal earnings weakness and trigger a response from regulators.
Mr. Rosenberg, who correctly anticipated a dividend cut at Bank of New York Co. last April and the payout reduction last week by First Interstate, has added Wells Fargo to his list of candidates for reductions.
Capital Is Key
After taking steps to shore up its capital ratios with an unexpected loan-loss reserve, resulting in a break-even second quarter, Wells could cast a cold eye on its dividend. However, management of the San Francisco company affirmed the payout.
But Mr. Rosenberg said: "If, as we suspect, further loan problems should surface, Wells' thin capital base could call the current $4 dividend into question."
Wells' tangible common equity equaled only 3.6% of its total assets on March 31, he noted, the fourth lowest among a universe of 15 money-center and large West Coast banks that the analyst tracks closely.
George M. Salem, the banking analyst at Prudential Securities in New York, also warned that "the safely of the dividend is now of greater concern" when he cut his investment rating on Wells' stock from hold to sell.
"After years of a very favorable loan quality image and superb loan quality performance, the shocking news of large loan problems in the second quarter changes that image and creates great uncertainly for the future," he said.
