And thoughts of bank dividends danced in their heads

11/22/2010 2:31 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com



One more test, and, if you pass, you can start paying dividends. That’s what the Federal Reserve told the 19 big banks that were the subject of the original stress test during the financial crisis. Financial statements and capital plans for the new test are due by January 7.

Investors who have been waiting for news that banks such as JPMorgan Chase (JPM) and US Bancorp (USB) are free to increase the dividends that they cut to just a quarterly 5 cents a share during the financial crisis are a step closer to getting that payout.

If the bank in which they hold stock passes. And with bank stocks down across the board on worries about the euro, higher capital requirements under Basel III, and a generally lower market, this seems a good time to be thinking about banks that will pay dividends sooner rather than later.

The requirements are pretty simple. The banks must show they have the ability (that is, the capital) to withstand losses under “adverse” economic conditions over the next two years. Banks must also demonstrate that they will be able to meet the new capital requirements imposed by the Basel III international banking rules approved in November and by new federal banking regulations. And they must have paid back any bailout funds they received from Washington.

On the short list of banks that I think will pass and that have said they want to raise dividends, I’d put JPMorgan Chase, US Bancorp, and Bank of New York Mellon (BK). Those three are down 2.7%, 1.2%, and 1.8%, respectively, today, as I write this at 2:30 New York time.

A group of regional lenders including Fifth Third (FITB), KeyCorp (KEY), SunTrust (STI), and Regions Financial (RF) won’t pass the test because, among other things, they haven’t paid back their bailout money.

Investors won’t know precisely why any bank failed to get the go ahead because the results of the test won’t be made public.

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