REGULATORS TELL U.S. BANKS TO HOLD FUNDS / THE FINANCIAL TIMES ( RECOMMENDED READING )

Regulators tell US banks to hold funds

By Justin Baer and Francesco Guerrera in New York

Published: March 9 2010 22:30

US regulators have told banks not to increase dividends or buy back shares until political and economic uncertainty surrounding the industry dissipates, in a move that will delay by months the return of capital to shareholders.

Some investors in financial stocks argue that winners of the credit crisis, such as JPMorgan Chase and Goldman Sachs, have profitable businesses and strong balance sheets and should consider raising dividends or buying back stocks.

Executives at the two companies have talked in public and with regulators about the possibility of returning cash to investors after taking action to conserve resources during the turmoil. But they say they are not in a rush to go ahead, especially if their watchdogs oppose such moves. “Regulators are gun-shy at this stage, partly because they fear that giving the green light to healthier banks to return cash to investors would prompt demands from more troubled institutions to do the same,” one senior Wall Street executive said.

JPMorgan, which cut its dividend by 87 per cent in 2009, and Goldman, which halted share buy-backs in July 2008, declined to comment. Goldman’s incentive to buy back stock is heightened as it pays $500m a year in dividends to Warren Buffett since  his  purchase  of  $5bn  of preferred securities at the height of the crisis in September 2008.

People close to the situation said  government agencies, led  by the New York Federal Reserve and the Treasury, told banks they would have to wait until the economic and legislative picture became clearer before returning funds to investors.

In a letter sent in December, officials reminded financial groups they would have to meet criteria, such as “stress-testing” their balance sheets and achieving sustainable profitability, before releasing funds to shareholders. The New York Fed and Treasury declined to comment.

Some bank executives are optimistic the regulators’ stance may soften in the coming months should more evidence emerge that the economic recovery has gained steam and corporate profits surge.

But industry watchers argue that even a sustained improvement may not be enough to sway regulators until Congress and international bodies draw up new rules on capital buffers and how to deal with failing banks, which is likely to be late this year at the earliest.

Mike Mayo, an analyst at CLSA, said: “The word banks have used the most ... is ‘fragile’. With all the uncertainty around capital ratios and regulation, it seems early for banks to consider these moves.”

Jamie Dimon, JPMorgan’s chief executive, told investors last month that he would like to increase the bank’s dividend “soon”, but not before he sees US employment increase “consistently, for several months”.

“We have tons of capital and tons of liquidity,” Mr Dimon said. ”If we are lucky [the increase] will happen some time this year.”

JPMorgan had slashed its quarterly payout in December 2008, to 5 cents a share, from 38 cents. Executives have said the bank would like to raise it to around 25 cents a quarter. Mr Dimon also said JPMorgan “would buy back tons of stock” in the next couple years if the bank runs out of opportunities to invest in its businesses and the stock price is low.

Copyright The Financial Times Limited 2010.