Fed rejects Bank of America's dividend hike plan | The Mesh Report

Fed rejects Bank of America’s dividend hike plan

the Mesh Report Staff March 23, 2011 0


NEW YORK – Bank of America said Wednesday the Federal Reserve has objected to its plan for raising its dividend in the second half of this year, a setback that suggests regulators need to see more evidence that the nation’s largest bank is strong enough to weather another recession.

But the bank said in a regulatory filing that it’s been given another opportunity to submit a comprehensive plan to the Fed so that the central bank may reconsider its decision. The Charlotte, N.C., bank expects to resubmit a request to dole out a higher second-half dividend.

The bank has paid a penny-per-share quarterly dividend for the last two years. Its last one-cent dividend was declared in January and payable on Friday. The dividend peaked at 64 cents in mid-2008 before being halved to 32 cents later that year.

Bank of America shares fell 14 cents, or 1 percent, to $13.74 in pre-market trading.

Last week, the Fed cleared the way for major lenders to increase their dividends if they passed “stress tests” to see if they are strong enough to stand up to another economic downturn. Banks had been forced to cut dividends to preserve cash following the financial crisis that peaked in late 2008. It was a condition of the government’s bank bailout package.

The Fed said at the time it expects that “some” banks will increase or resume dividend payments, buy back shares or repay government capital, but it didn’t reveal the names or number of banks that are expected to do so.

All of the 19 largest banks overseen by the Fed were subject to the tests. By increasing dividend payments, banks may be able to attract new investors, which should lead to more lending. The Fed has said it is taking a “measured and conservative approach” on banks’ dividend requests.

The Fed also cleared investment bank Goldman Sachs to buy back all the preferred shares it issued to Berkshire Hathaway Inc., the conglomerate run by billionaire Warren Buffett. Other banks, including JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp also announced large share repurchases.

Citigroup Inc. on Monday said it planned to reinstate a penny-per-share quarterly dividend and announced a reverse stock split, which will lift the company’s stock price and allow more institutional investors to own it.

BofA’s stock has lagged its competitors in the last year and has remained relatively flat so far in 2011. Investors have been worried that regulations enacted after the financial crisis will make it difficult for Bank of America to increase profits and grow many of its businesses, especially its credit and debit card business. The bank has warned that it would lose at least $2 billion in annual revenue for a few years in its card business.

Last year, in Bank of America CEO Brian Moynihan’s first year at the helm, its credit card unit took a $10.4 billion write-down due to new regulations, and its home loan business struggled with fallout from the implosion of the housing bubble. The bank reported a 2010 loss of $3.6 billion.

Most of the bank’s problems stem from its 2008 purchase of Countrywide Financial, which at the time was the country’s largest mortgage company. While the deep slump in the real estate market has hurt all its competitors, Bank of America has been at the center of almost every controversy involving bad home loans.

It paid $2.8 billion late last year to the government-owned mortgage companies Fannie Mae and Freddie Mac to settle claims the bank sold them defective mortgages. In the fourth quarter, it kept aside $4.1 billion for more bad home loans that it could be forced to buy back from the two government agencies and other investors. It also set aside another $1.5 billion for litigation expenses related to bad mortgages.

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