Nomura Securities on U.S. Banks: Yielding Results...Sort Of

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Nomura Securities on U.S. Banks: Yielding Results (Sort Of...)

Analyst, Brian Foran, said, "Investors are very focused on prospective dividend yields of banks. The reasons are clear: income funds are getting most of the inflows, stocks are reacting well to dividend increases, banks will have yields higher than both the S&P 500 and 10-year treasuries, and stress test results are around the corner. Having said all that, our basic conclusion is a little extra yield is just that – bank dividend yields are likely to increase from 2% to 3%, which is an extra 100bp of annual returns, but not a catalyst for multiple rerating. Post the stress test, dividends payouts are likely to go to 30% of 2012 earnings. Banks with the highest expected yields are JPMorgan (NYSE: JPM) (3.7%), Discover (NYSE: DFS) (3.6%), Fifth Third (Nasdaq: FITB) (3.2%), Bank of NY (NYSE: BK) (3.2%), Wells Fargo (NYSE: WFC) (3.1%) and PNC (NYSE: PNC) (3.1%). Banks may be stuck with 30% dividend payout ratios for some time. It is unusual for bank yields to be higher than 10-year treasuries. Dividends are in favor today."

"In reality, the sector average will probably be a little lower than that as several banks won’t be able to payout 30% of earnings. The table below splits banks into “free and clear” (i.e. banks that should do fine on the stress test) and “limited capacity (i.e. banks with no or small payouts expected for 2012). Different banks have limited capacity for different reasons – Regions (NYSE: RF), Synovus (NYSE: SNV) and Zions Bancorp (Nasdaq: ZION) still have TARP; CapOne (NYSE: COF) needs to fund its acquisitions; and Citi (NYSE: C) and BofA (NYSE: BAC have low Basel 3 ratios they need to build up."