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Big Banks and the Fed: Capital Return Preview

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) is likely to announce the "largest increase in capital return" among the largest U.S. Banks on Thursday, according to Atlantic Equities analyst Richard Staite.

Following the Federal Reserve's announcement last week of the results of its annual stress tests for the 18 largest U.S. banks, the regulator will announce the results of the Comprehensive Capital Analysis and Review on Thursday at 4:30 p.m. EST.

The CCAR applies the Fed's "severely adverse scenario" of a nasty recession beginning in 2013, to the large banks' plans to deploy excess capital through dividend increases, share buybacks and acquisitions, through the first quarter of 2014. Most of the largest banks, along with many large regional banks not subject to CCAR but subject to the Fed's Capital Plan Review (CapPR), are expected to announce dividend increases and/or stock buybacks.

Citigroup (C - Get Report) pays a nominal quarterly dividend of 1 cent a share. The company had its initial 2012 capital plan rejected by the Federal Reserve last March and the updated plan that was approved in August included no additional capital return through the first quarter of 2013. Citi jumped the gun last Thursday, by announcing it had requested Fed approval for $1.2 billion in share buybacks through the first quarter of 2014, with no dividend increase.

Citigroup passed the stress tests with flying colors. The Federal Reserve said under the severely adverse scenario the company would lose $28.6 billion through 2014, with a projected minimum Tier 1 common equity ratio of 8.3%. This was the highest among the "big four" U.S. banks: Citigroup, JPMorgan Chase (JPM - Get Report), Bank of America (BAC - Get Report) and Wells Fargo. So it appears quite likely for Citi's buybacks to be approved, although some investors may be disappointed. Assuming Citigroup stays the course in trimming its balance sheet and improving efficiency, excess capital should continue to build over the next year.

"We expect most banks to announce dividend increases but share buyback plans could be modest given the need to meet full Basel III requirements by year end," Staite said in a report on Wednesday.

Wells Fargo has been the strongest and steadiest earner among the "big four" through the credit crisis and in the recovery so far. Over the past four years, the company's return on average assets has increased steadily from 0.97% in 2009 to 1.41% in 2012. JPMorgan Chase's ROA has risen from 0.58% in 2009 to 0.94% in 2012. During the same period, the ROA for Citigroup has ranged from a -0.08% to 0.57%, and Bank of America's ROA has ranged from -0.09% to 0.26%.
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