Colin Barr

Following the money in banking, economics, and Washington

BofA's daft dividend talk

January 21, 2011: 12:10 PM ET

The healthiest big banks will soon start boosting their dividends. But except for its CEO, almost no one counts Bank of America in that group.

BofA (BAC), the biggest U.S. bank by assets, hardly seems a likely candidate for a near-term dividend hike. The Charlotte-based bank posted a fourth-quarter loss Friday and figures to spend billions of dollars in coming years draining the subprime swamp surrounding its home loans business, most of which used to be known as Countrywide.

The CEO of wishful thinking?

Yet CEO Brian Moynihan spent Friday morning trying to sell Wall Street on the notion that BofA could soon get regulatory clearance to increase its dividend, which has been stuck at a penny a quarter since the meltdown of 2008.

"We believe we are in position to modestly increase the dividend in the back half of 2011," Moynihan said on the bank's Friday morning conference call with investors.

Moynihan is nothing if not upbeat. That's not a bad trait for a guy charged with overseeing the cleanup of his predecessor Ken Lewis' deranged 2008 entry into an imploding mortgage business. And it's only natural that the CEO would want to emphasize the health of his company's business -- and perhaps dangle a yieldy carrot before investors at a time when competitors are clearly en route to higher payouts.

Still, his comments on the dividend come across as hopelessly out of touch. Bank regulators must approve any dividend increase by the big banks that are undergoing stress tests, and they surely haven't forgotten that BofA nearly toppled once before.

Unlike JPMorgan Chase (JPM), which is widely expected to be among the first banks to raise its dividend from crisis levels, Bank of America still faces questions about its financial strength. To that end, the watchdogs can't be overlooking the many questions about how much the bank might have to spend to buy back souring mortgages from investors.

BofA took some modest steps Friday to answering some of those questions. Moynihan said the bank expects to exceed capital guidelines as they are phased in, and executives for the first time estimated the costs BofA could face in settling so-called private label mortgage repurchase claims.

Stressing that this is only a guess, BofA said it believes its exposure to these so-called private label putback claims could cost shareholders $7 billion to $10 billion before taxes.

Those numbers were met with some skepticism even among BofA's fans on Wall Street, where high-end estimates have been running to $15 billion and above.

Management "commented on $7-10 bil range for private label issue vs. our $13 bil est., but we believe the stock is implying significantly higher," Citigroup analyst Keith Horowitz wrote in a note to clients. He rates BofA buy.

Similarly, options markets are implying there is next to no chance BofA will be cleared to increase its dividend payments in 2011, judging by the relative prices of put and call options on BofA stock.

Pricier puts imply the market is expecting a dividend increase – a condition plainly in view at JPMorgan Chase, for instance. A recent report by strategist Vadim Zlotnikov at AllianceBernstein notes that options markets are priced for full-year dividend payouts to rise 178% at JPMorgan, 110% at Wells Fargo (WFC) and 251% at State Street (STT).

But for BofA? Not so much.

"The options markets to me are not pricing in any increase this year at Bank of America," said David Rosenblum at MKM Partners. "If it's going to happen, the options aren't showing it."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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