Despite fire sale yields of around 9% for several regional bank stocks recently, the group’s dividend outlook looks stable.
Its shares have been volatile, rising one day and falling the next amid concerns of further contagion in the sector.
A recent concern: PacWest Bancorp (ticker: PACW) has cut its quarterly dividend from 25 cents to one cent per share.
Paul Taylor, CEO of the Beverly Hills-based bank, called the cut “a prudent move to accelerate our capital-building plans” in a statement Friday.
The bank’s shares fell on May 4 after a published report that PacWest was exploring strategic options, including a potential sale. After falling 50.8% on the day, it rallied 82% on May 5th.
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The stock gained another 3% on May 8.
Shares in other regional banks have not been as volatile, though concerns about the stability of their deposits have dogged those companies ever since the Silicon Valley Bank collapsed in March.
Bank stocks took another big hit last week as the SPDR Regional Banking Exchange Traded Fund (KRE) lost 10% of its value.
On May 4, shares in Zions Bancorporation (ZION), a Salt Lake City-based regional bank, returned 8.6%. Dallas-based Comerica (CMA) was at 9% and KeyCorp
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(KEY) was 9.2%. KeyCorp is located in Cleveland.
Those dividend yields have all come down a bit since then, as stocks have recovered somewhat.
Analysts polled by FactSet expect KeyCorp to pay a dividend of 83 cents per share on estimated earnings of $1.60 this year, which translates to a payout ratio of just over 50%. For Zions Bancorp, it’s $1.68 per share on estimated earnings of $5.22. It’s $2.86 per share at estimated earnings of $8.16 for Comerica.
All three banks rely more heavily on net interest income than fees compared to many of their peers, according to Eric Compton, who covers large banks for Morningstar.
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As interest rates have risen, banks are facing higher deposit costs – a dynamic that is putting more pressure on their net interest income.
However, Compton doesn’t expect any of those three banks to cut their dividends.
PacWest’s recent dividend cut, meanwhile, appears to be more of an anomaly than a budding trend for the group.
First Republic Bank, which was not a purely regional bank focused on wealth management, suspended its dividend in early April amid large deposit outflows. This bank was subsequently acquired by JPMorgan Chase (JPM) on May 1st.
A statement from RBC Capital Markets on Monday said: “Despite a fresh round of problems with regional banks over the past week, the KBW Nasdaq Bank Index continues to show signs of stabilisation.”
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Most of the larger regional banks survived the first quarter with their dividends intact.
“None of the banks I’ve served other than First Republic have been in serious trouble,” says Morningstar’s Compton.
The regional banks he covers include M&T Bank (MTB), US Bancorp US Bancorp (USB), Regions Financial (RF) and PNC Financial Services Group
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(PNC).
How dividends fare for the rest of this year for regional banks depends in large part on the health of the economy. If credit growth reverses and banks have to add large amounts of capital to their reserves to cover loan losses, this could put pressure on dividend payments.
Compton expects the regional banks he covers to maintain their dividends. But he sees these banks becoming more conservative when it comes to pushing through dividend increases or aggressive share buybacks.
Regional bank stocks are still profitable, but investors are facing more volatility.
Write to Lawrence C. Strauss at [email protected]