Expect 'Gradual' Increase in Capital Returns Following Bank Stress Tests: Goldman

Bank stocks have rallied, making buybacks less attractive. JPMorgan Chase (JPM) CEO Jamie Dimon recently said that a special, one-time dividend might be a more preferable alternative to buybacks.

Investors are hoping that Citigroup (C) and Bank of America (BAC) will increase their dividends. Both banks currently pay annual dividends of $0.04 a share.

Citigroup's capital return request was rejected last year, while Bank of America's was rejected the year before. Both banks are keen on avoiding public rejection.

"While [Citi] and [Bank of America] have strong capital ratios currently and could theoretically beat our estimates and increase their payout ratios to a level consistent with peers and still 'pass' the stress test, we think an outsized increase in capital return for these names is unlikely in 2013 given: 1) the Fed seems to be imposing a "walk before you run" policy for large-cap banks and 2) recent statements from management teams indicating their first priority is 'passing' the stress test, not increasing returns," Goldman analysts noted.

The analysts also do not expect big capital deployment from Capital One (COF) as it is focused on rebuilding its capital levels after its acquisition of HSBC's U.S. credit card portfolio.

According to the report, Discover Financial Services (DFS), Northern Trust (NTRS) and BB&T (BBT) are best positioned to increase capital returns while SunTrust (STI) and Regions Financial (RF) are set to initiate meaningful capital returns to shareholders.

-- Written by Shanthi Bharatwaj from New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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