Southeastern banks with strong preprovision earnings are expected to follow JPMorgan Chase’s lead and raise dividends in 2011, creating attractive valuations among the stronger banks in the region, says Adam C. Barkstrom, a senior research analyst at Sterne Agee & Leach, Inc.
“I think if Jamie Dimon sort of sets the stage or raises the dividend in 2Q, I think this sets the stage for the other stronger banks — Wells (WFC), USB (USB), BB&T (BBT) — to boost their dividend,” Barkstrom said. “And I think that has got to play into the valuations of these companies.”
Barkstrom points to Wells Fargo as his top stock pick in the sector. WFC‘s credit trends are stabilizing, their private label put-back risk is very manageable, and Barkstrom expects the bank to raise strong dividends.
“[WFC‘s] preprovision ROA is 3%; industry average is 1.7%. That is a huge difference. Capital accretion for these guys . . . I think now they are at 6.6%. By the end of 2012, they are 9% tangible common. That’s monstrous,” Barkstrom said. “The dividend issue, they at precrisis were paying $0.37 a quarter, now they are paying $0.05 a quarter. So we could see a very significant bump in their dividends.”
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