Regional banks’ dividends look safe despite jitters

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The failure of Silicon Valley Bank set off an earthquake that is still reverberating across the regional banking landscape.

SPDR Regional Banking
The exchange-traded fund (ticker: KRE) has lost about third of its value since March 8, when the bank’s liquidity problems became public knowledge. The turmoil raises an important question for investors in regional bank stocks: How safe are their dividends, a key attraction of these stocks? Answer: A little safer than afraid.

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

Truest Financial

(TFC), large regional bank based in Charlotte, returned 6.5% compared to an average of 4.3% over the past 12 months. Minneapolis based

US Bancorp

(USB) is at 5.4%, versus its one-year average of little over 4%.


(Keys), which is headquartered in Cleveland, is at 7% — three percentage points higher than its average of 3.7%.

These banks face number of headwinds that will certainly make dividend growth challenging in the near term. case in point:

First Republic Bank

(FRC), which announced on Thursday that it would receive $30 billion in uninsured deposits from group of banks, said it has suspended its dividend.

Many banks are likely to keep raising the rates they pay on deposits to help stabilize their funding and prevent rapid withdrawals – dynamic that contributed to the failure of Silicon Valley Bank.

signature bank

(SBNY), one of relatively few banks working with cryptocurrency companies, also failed.

To strengthen their financial position, some banks may have to cut lending, putting pressure on earnings. “The best way to maintain or create liquidity is to slow down your borrowing,” says Dave Allison, portfolio manager at Hennessy Funds and an expert on bank stocks. “There’s less money out the door.”

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And if the economy deteriorates further, possibly into recession, banks will have to increase their loan-loss reserves. All these factors will have an impact on earnings. This, in turn, will impact dividend growth.

However, “I don’t think [these banks] are anywhere close to thinking they have to cut the dividend,” Ellison says. His sentiments were echoed by three other investment professionals. Baron’s spoke for this column.

One of them, Anton Schutz, is the longtime manager.

RMB Mendon Financial Services

Fund (RMBKX), which focuses on small-cap issues, thinks the more likely scenario for regional banks is pause in share buybacks. He doesn’t expect a dividend cut.

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

company / ticker latest price dividend yield market value (bill) Price change from 8th March*
Fifth Third Bancorp / FITB $25.41 5.2% $17.4 -39.4%
keycorp / key 11.75 7.0 10.9 -47.5
M&T Bank / MTB 124.89 4.2 21.0 -23.6
PNC Financial Services Group / PNC 125.05 4.8 50.0 -28.6
Truist Financial / TFC 32.1 6.4 45.6 -41.0
US Bancorp / USB 35.44 5.4 54.3 -33.5

Note: Prices and pricing change as of March 15; Other data as of March 16. *March 8 is when SVB Financial Group’s sale of loss-making bonds from its portfolio was publicly disclosed for the first time.

Source: FactSet

Among regional bank stocks favored by Katz are Trueist Financial, US Bancorp and

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PNC Financial Services Group

(PNC), which yields 4.8%.

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

In a research note, Cassidy wrote that in the fourth quarter of last year, 93.8% of Signature Bank’s deposits were uninsured — meaning they were in individual accounts larger than $250,000 covered by the Federal Deposit Insurance Corp. The tally in Silicon Valley Bank’s deposits was 89.3%. Guardian,

SVB Financial Group

(SIVB) – The second highest tier among banking companies, behind RBC Capital Markets.

In contrast, the ratio of uninsured deposits to total deposits was 57.2% at US Bancorp, 54.3% at Truist, 59.3% at KeyCorp, 52.7%.

M&T Bank



), and 54.5%

fifth third bancorp

(FITB), according to RBC.

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

Katz expects that overall the bank will “do well and make a full recovery” and that their stocks will eventually move higher. But he warned that the risks have increased and the deadline has been extended.

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Ellison expects banks to focus on 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 safe. He sees a very different situation this time, versus what happened in the financial crisis 15 years ago. In 2008–09, a major credit crunch halted payouts. “We don’t have that this time,” he says.

After that, many banks cut or suspended their dividends. For example, in early 2009, US Bancorp reduced its payout from 42.5 cents a share to nickel. KeyCorp halved its dividend to 18.75 cents in March 2008, then reduced it twice more, finally to just a penny.

In a recent note, Cassidy said he expects “buying opportunities to present themselves” after some near-term bounce on deposit outflows. He cited banks such as Fifth Third Bancorp, which had a yield of 5.2%; KeyCorp; PNC; M&T, 4.2%; truest; and US Bancorp.

Although Cassidy doesn’t expect any major regional banks to cut their dividends, a severe economic downturn would change his hopes. “If you’re going to tell me we’re going to have a recession this year with 10% unemployment, all bets are off,” he warned.

Bottom Line: Investors should closely monitor news about regional banks, even though most are unlikely to cut their dividends. Foreshadowing is foreshadowing, especially in times like these.

write to Lawrence C. Strauss at [email protected]