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April 3 (Reuters) - Credit Suisse said Bank of America Corp (BAC.N) and Wachovia Corp WB.N may lower their dividends as an option to preserve capital and guard against significant credit quality deterioration over the near-term.
Wachovia appears most at risk for a dividend cut in the near-term, given its vulnerability to residential housing and relatively thin coverage ratios — a measure of the company’s ability to meet its debt obligations, the brokerage said.
While both Bank of America and Wachovia’s capital footing and earnings are particularly vulnerable in the current environment, Bank of America’s business line diversity and internal capital generation provides it greater flexibility when compared to its smaller peer, Credit Suisse said.
Since February, analysts of at least two brokerages have predicted dividend cuts at certain U.S. banks in 2008.
Bernstein analyst Kevin St. Pierre had, in February, said that several U.S. banks, including Bank of America and Wachovia, were likely to cut their dividends to shore up capital.
Last week, Oppenheimer & Co analyst Meredith Whitney had also said that she expected Wachovia and Citigroup Inc (C.N), along with other U.S. banks, to announce dividend cuts in April as banks’ earnings would not support current dividend payouts in 2008.
However, Wachovia Chief Executive Ken Thompson had said in January that the bank’s 64 cents-per-share quarterly common stock dividend was safe.
NEAR-TERM CAPITAL RAISE?
The probability of a dilutive equity raise at Bank of America and Wachovia is relatively low in the near-term, Credit Suisse said.
Bank of America has raised about $12 billion of hybrid capital and Wachovia about $5.8 billion over the last six months, the brokerage added.
The capital raise likely addresses the projected market disruption losses of about $10 billion at Bank of America and $4.5 billion at Wachovia, but fails to provide sufficient hard equity support for worse-than-expected credit quality, Credit Suisse said.
The brokerage rates Wachovia “underperform” and Bank of America “neutral.”
Shares of Wachovia were trading at $28.54 in afternoon trade on the New York Stock Exchange. Bank of America shares were trading at $40.48. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy, Himani Sarkar)