Why banks are not justified to boost dividend payments? (The Motley Fool)

With the Federal Reserve finally give his consent for major banks to increase dividend payments, is everyone catches a sigh of relief well, almost everyone.

The rating agency Standard & Poor seems to have different ideas.

Immediate results
With several large banks plans to raise their dividends and buy back stock, it seems that the financial crisis is firmly a thing of the past. Economic recovery helped by strong operating profits in the financial sector has no doubt helped banks pass stress of dividend tests.

We will put things in perspective. According to the revisions in GDP last week, the finance sector represents 30% of all operating profits in the fourth quarter of 2010. Given the recent nature of the financial crisis, it is certainly a good thing for banks, especially because this sector contributes less than 10% of global GDP.

In absolute figures, financial profits jumped 426.5 billion. It is agreed that the financial sector has paved the way to the recession, but now the same area shows the way out. Should not now be right of return of capital to shareholders?

Does not, in the S & P. rating agency The reason: the economic crisis is not completely finished and banks still do not have balance sheet strength to afford the return of capital to shareholders. The Agency said that the banks need a capital ratio of 8% adjusted risk to ensure that another financial crisis is averted, and he argues that banks still fall far from the target on an average read 7.6% at the end of 2010.

Performance
Then how exactly the banks are placed? Large banks have certainly been recovered. We'll have a look at their individual capital ratios.

According to standards Basel III - the new set of global standards following the financial crisis of relevance in the requirements for own funds of the Bank, liquidity and leverage - the ratio of minimum capital level 1 must be 6% and 8% of total capital ratio.

Bank of America(NYSE: BAC - News) tier 1 capital ratio is 11.2%, while the total capital ratio is 15.8%. This is not bad. However, the Fed has recently blocked his move to increase dividends later this year. It is perhaps because of the huge Mortgage Bank business, which is still under particular review of institutional investors and state attorneys general. Quite fair.

JPMorgan Chase (NYSE: JPM - News) have a level 1 of 12.1% capital ratio and a ratio of total capital of 15.5%. With the approval of the Fed, the Bank is raising its quarterly dividend of $0.25 per share of $0.05. It is also planned to purchase a new stock of $ 15 billion. This Bank behaves like the crisis is almost entirely behind it.

Citigroup (NYSE: C - News) have a level 1 of 12.9% capital ratio and a ratio of total capital of 16.6%. The Fed has approved its plan to return to its dividend per share of $0.01.

A capital(NYSE: COF - News) tier 1 capital ratio amounted to 11.6%, whereas the total ratio of 16.8%. The Bank did not disclose the Fed response, on its capital plan although it will not raise its dividend this quarter. However, he managed to significantly reduce its leverage ratio of the year by 8.1% to 10.3% at the end of 2009, and its total assets-total equity to a very low 7.4.

Goldman Sachs (NYSE: GS - News) is a level 1 of 16% capital ratio, while the total capital ratio stands at 19.1%. Traditionally, such as Goldman Sachs and Morgan Stanley investment banks are supposed to keep higher levels of capital because their assets tend to be riskier. The Fed approved recovery of the Bank of 5.65 billion from Warren Buffett, including the 10% bonus, which he borrowed during the financial crisis.

Morgan Stanley (NYSE: MS - News) have a level 1 of 16.6% capital ratio and a ratio of total capital of 16.5%. Another bank yet to reveal the answer of the Fed, I am told it will be profitable ways to use its excess capital, which means he could he reinvest in the business or buy a new stock.

What next?
Is S & P justified to issue warnings that "this junction of the economic recovery", excessive places paid to investors could be detrimental to the own funds requirements? Probably yes. Seems to the Agency, with Moody's and Fitch (three major ratings agencies), is particularly subject not to repeat errors, as they were all completely in the dark on the financial collapse in 2008.

My attitude is that S & P is more concerned with special dividends and stock buybacks that could reduce the levels of capital. This position is justified, despite the fact that these large banks collected considerable profits, because who does not continue forever.

Someone must be on huge leverage employ large banks, as happens to be one of the main causes of the crisis. The problem stems from the fact that some banks take for granted that they are "too big to fail" and believe the Government bailout will always be around. Their claims that capital levels are adequate and should therefore be treated critically. There is no harm to be careful when the high unemployment rate, Government cuts and rising oil prices pose risks to the US economy.

ISAC Simon is not owner of the shares of any of the companies mentioned in this article. The fool is the owner of the shares of Bank of America and JPMorgan Chase. With a separate portfolio of Rising Star, The Fool is also short of Bank of America. Try our services Foolish newsletter free of charge for 30 days. Us Fools can not all hold the same views, but we believe that treat a wide range of ideas makes us better investors. The Motley Fool has a disclosure policy.

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