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5 Banks Set to Pay Investors From Jefferies

NEW YORK ( TheStreet) -- Jefferies analyst Ken Usdin on Wednesday highlighted five large bank holding companies "best equipped to pay out a higher percentage of earnings this year," following the completion of Federal Reserve stress tests.

With the Fed expected to publicly announce the stress tests results next Friday, Usdin expects "few surprises," believing that "the output will reflect a still cautious Fed that favors capital accumulation over deployment."

On average, the analyst forecasts "all-in payout ratios" -- including dividends and share buybacks -- "in the 40%-60% range, with a slight bias towards dividends."

Looking at dividends alone, Usdin said that "most banks seem content for now with dividend payout ratios of 20%-30% given Fed guidance that requests for more than 30% will be under increased scrutiny." During 2012, the analyst expects more banks to begin buying back shares, although "the overall impact to earnings should be fairly modest," because if "banks use 20%-30% of earnings for buybacks, share counts only move 2%-3% lower."

Banks likely to authorize share repurchases for 2012, according to Usdin, include Northern Trust (NTRS - Get Report), State Street (STT - Get Report) and U.S. Bancorp (USB - Get Report), while those less likely to buy back shares include Regions Financial (RF), M&T Bank (MTB), and Zions Bancorporation (ZION) -- all of which have bigger fish to fry, since they still owe federal bailout funds received through the Troubled Assets Relief Program, or TARP -- and PNC Financial Services Group (PNC), which just completed its acquisition of RBC Bank (USA).

For the three banks still owing TARP money, Usdin says that his "base case is that each bank will have to issue 20%-40% of TARP in common equity, but note that the recent company commentary tends toward the smaller side (if any)."

Regarding the general landscape for increased payouts of earnings during 2012, the analyst said that "With the average bank in our universe sitting on around 9% Basel III-adjusted Tier 1 common, it is hard not to make the argument that there is excess capital in the system."

All eyes will be on the Fed next Friday, for the expected public announcement of the stress test results. Usdin said that "public disclosure could raise some eyebrows," and that any variance with "current estimates for losses and pre-provision income will be closely watched, as investors decipher what it could mean for forward earnings projections."

Here's a quick look at the five large bank holding companies covered by Jefferies, that Usdin says are "best equipped to pay a higher percentage of earnings this year, sorted by ascending ratio of estimated total payout to earnings:
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