Bank Dividend: Is It Safe?



Despite the favorable economic attributes belonging to almost all banks, dividend cuts can and do occur.
A wise old gentleman with decades of industry experience once told me, “ Banks don ’ t get in trouble by paying too much for deposits. Banks go bad when they make bad loans. ” So the first question one should consider is the bank ’ s asset quality.
I start with the balance sheet. As you might expect, real - world bank balance sheets are not so simple as the example I showed at the beginning of this appendix. In addition to loans and securities that throw off interest income ( earning assets ), banks also have their own property (branches, computers, and so forth), as well as (in most cases) a goodly sum of goodwill and other intangible assets.
The key figures here are at the bottom.
Loan/loss ratio . This is the allowance for loan losses divided by total loans outstanding. Since BB & T is a conservative lender with a history of low charge - offs, 1.1 percent looks okay. If the bulk of BB & T ’ s loans were of questionable quality, this might not be nearly enough.
Equity/asset ratio . All else being equal, the higher this figure, the stronger the bank. Looking at the bank ’ s book figure of 9.7 percent, BB & T looks very strong indeed.

However, not all of BB & T ’ s assets have real cash value. In the past, BB & T has made dozens of acquisitions, usually paying more for the acquired firm than its net asset value. This premium accumulates in an account known as goodwill and other intangible assets; BB & T has a whopping $ 5.3 billion
worth. If we back these intangibles out of assets and equity, total assets drops a little, but equity drops a lot.
Is a 5.6 percent tangible equity/assets ratio enough? We have to read this statistic in context of the bank ’ s size and lending strategy. For conservative lenders like BB & T, equity/assets ratios of 5 percent or greater are generally fine. Large foreign banks often have equity/asset ratios lower than this, presumably because their governments stand ready to ensure they don ’ t fail — the risk to the economy would be too large. In the United States, however, there ’ s nothing to stop a badly run bank from wiping out shareholders or merely slicing its dividend. Adequate capital provides an all - important cushion for shareholders. But for riskier lenders or smaller banks, I might want to see a much higher tangible equity/assets ratio of 8 percent, or possibly 10 percent.