Capital One: Federal Reserve Winner

March 14 is an even more important date for investors, since the Fed will announce the results of the annual Comprehensive Analysis and Review (CCAR). The CCAR applies the stress test scenarios to the banks' submitted capital plans. If last year's test results were a reasonable guide, investors can expect a flurry of announcements by banks of dividend increases, as well as authorizations to repurchase shares.

Bank of America (BAC) and Citigroup (C)will be closely watched, with each company currently paying a nominal quarterly dividend of just $0.01 a share. Bank of America's 2012 capital plan included no increased return of capital to investors. Citigroup's initial capital plan for 2012 included a dividend increase, but was rejected by the Federal Reserve last March. The company's revised capital plan was approved in August, but included no dividend increase or share buybacks.

Goldman Sachs analyst Richard Ramsden in a report on Monday said that "the average bank can request capital returns in line with our estimates, see its [pre-provision net revenue] fall 70% versus last year's stress test and still maintain 5% Tier 1 Common ratio, in our view."

Pre-provision net revenue, or PPNR, is a useful earnings gauge for banks' earnings performance, because it looks past the effect of provisions for loan losses. During the credit recovery, many banks are seeing their bottom lines boosted by the release of excess loan loss reserves that were built-up at the height of the credit crisis.

Goldman Sachs estimates that Bank of America will pay a total of $0.09 a share in dividends during 2013, while being approved for $720 million in share buybacks. For Citigroup, Goldman estimates total 2013 dividend payouts of $0.20 a share, with $2.110 billion in buybacks.

Ramsden said that Goldman was "most optimistic relative to the Street" on Capital One, Discover Financial Services (DFS) and Northern Trust (NTRS), "on post-CCAR dividends."

• Capital One currently pays a quarterly dividend of $0.05. The company made two major acquisitions of ING Direct (USA) and HSBC's (HBC) U.S. credit card portfolio during 2012, and is therefore not expected to request approval for share buybacks this year. However, Ramsden estimates Capital One will raise the quarterly dividend to $0.2375.
• Discover currently pays a quarterly dividend of $0.14, for a yield of 1.41%, based on Monday's closing price of $39.76 Ramsden estimates that Discover will raise the dividend to $0.185 a share, and buy back $1.857 worth of shares during 2013.
• Northern Trust of Chicago currently pays a quarterly dividend of $0.30, for a yield of 2.23%, based on Monday's closing price of $53.82. Ramsden estimates that the bank will raise the dividend to $0.35, while also buying back $390 million in shares this year.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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