For Cassidy the big question remains the level of capital that banks need to hold and he is a clear believer that current capital reserves are excessive.
“We’re not saying we’re doing away with Dodd-Frank but there will be some reform and do we really need the levels of capital that some of these banks are being required to hold?” he asked.
Explaining that while the law requires 7 percent of core equity capital plus around a 1.5 percent buffer for regional banks, he notes that some banks are currently holding around 12.5 percent of equity capital.
“There’s no need for that. Because of the toughness of the Federal Reserve they haven’t been able to give it [capital] back more aggressively. We need to have an ample amount of capital, they need to be regulated, but the pendulum swung too much and now it needs to come back and it will come back,” Cassidy opined.
The managing director sees a period of increased capital returns to shareholders over the next couple of years, both in the form of buybacks and dividends.
“The industry slashed their dividends during the crisis…now the banks are rebuilding them… we expect dividend payout ratios to rise to 40 percent of earnings,” he said, noting that current levels are around 20 to 30 percent.
“Investors should expect over the next two years that dividends should rise not only in dollar terms but also as a percentage of earnings.”
Disclaimer: Gerard Cassidy does not personally own the shares of Bank of America, JPMorgan or Citigroup but RBC Capital owns and has relationships with a host of US banks including these three banks.
