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By Josh Peters, CFA and Jeremy Glaser | 03-09-2016 04:00 PM

Peters: It's Hard to Make a Good Case for Bank Dividends

Banks aren't totally uninvestible from an income standpoint, but they simply don't offer the kind of income characteristics that they used to, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

With global banks under continued pressure, I'm here with Josh Peters, editor of the Morningstar DividendInvestor newsletter, to see if it's opened up any opportunities.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: When you look at the banks both in the U.S. and abroad, what do you think is driving some of the volatility and the downward pressure we've seen in prices so far this year?

Peters: How could you not be panicking? It's never a good idea to panic, but when the sign in front of that interest rate turns negative, we're moving off into territory that we've never seen before. There is no real track record of what we should expect from banks, in particular, or economies in total, in a negative interest rate environment. And yet that's the territory that you're marching into in Europe and Japan. People even wonder if that will one day come to visit the United States. I still think the Fed is more likely to be raising interest rates as opposed to lowering them into negative territory. But it's nerve-racking.

Plus, you have the fact that outside the United States you haven't had as effective a cleanup of the banking system. Here in the United States, I look at our big banks and see they have a ton more capital. They're being regulated much more closely. I honestly think they're being over-regulated to the point where it's getting hard for them to fulfill their function of making intelligent loans and helping the economy grow, and helping businesses expand. But I don't have any fears in terms of safety and soundness.

Then you look at some of the big European banks that have not built up those bigger capital cushions the way our banks have, and it's a little bit nerve-racking.

So you don't have to be so shocked when Deutsche Bank just eliminates the dividend entirely. They need more capital, and they need a more coherent set of regulations to make sure that those institutions can serve the needs of their economies and provide some return to their shareholders.

Glaser: Do you think this means that dividend investors should just avoid the big banks, because there just isn't an opportunity there?

Peters: I'm not looking at any foreign banks at the moment. I feel like it's an industry where, based on my own experience back in 2008-2009, dividends are the first thing to get cut in a crunch: Let's just plug the hole. This is capital that regulators or, if they want to, management teams can say, we need to shore things up, so no more dividend for shareholders.

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