(Updated to include a discussion on the stress tests, with Kevin Petrasik of Paul Hastings.)
NEW YORK ( TheStreet) -- With the Federal Reserve set to announce the results of its annual bank stress tests late this week, KBW analyst David Konrad sees four major industry players ready to increase their dividend yields to over 3%.
The regulator is expected to publicly announce the stress test results March 15, with most of the largest U.S. banks having submitted plans that include an increased return of capital to investors, through higher dividends and share buybacks. Konrad expects a "more detailed disclosure" from the Fed "sometime before April 30."
With this year's stress tests featuring economic scenarios that are "significantly more negative than the prior year's scenarios," Konrad believes that "one of the Fed's goals is to limit capital leaving the banking system," in light of "uncertainty in Europe and potential spillover to the U.S. markets." The analyst also believes that "may not allow capital deployment to reduce capital levels unless through an acquisition." But even with that restriction, the bank holding companies could pay out significant portions of their earnings, while seeing their capital ratios continue to increase.Kevin L. Petrasic -- a partner in the Global Banking and Payment Systems practice of Paul Hastings, in the firm's Washington, D.C. office -- says the stress tests, "with their severe economic assumptions, are very meaningful," and that investors should take comfort that the "banks are demonstrating their ability to withstand remarkably dire economic consequences." Not every institution is going to be able to issue significant dividends or do significant stock buybacks, because the stress test requirements are very substantial," says Petrasic, who adds that "you really need to take a look and see those institutions identified as 'losers' and remember that two years ago we were on the brink of disaster. "I would caution investors to look beyond the comparative analysis and look at what the bottom-line numbers. Meanwhile, Petrasic expresses some concern that the Volcker Rule and other aspects of banking reform legislation could make the largest U.S. banks less competitive: "we need to avoid policies that undermine the competitiveness of the largest institutions that are really the engine of the U.S. economy , and we need to manage the risk, without eviscerating the ability for the largest U.S. banks to remain competitive internationally." Konrad said that "all eyes will be on Citi's results," since Citigroup (C - Get Report), since the stress test results "may provide the best view into the Fed's requirements," as they relate to "global systemically important financial institutions," as defined by the enhanced Basel III capital rules. KBW sees yield-hungry Citigroup investors being disappointed over the short term. Although "Citi is on track to generate excess capital within a two to three year time frame," Konrad thinks "its pro forma Basel III
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