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TheStreet Open House

'Rich to Get Richer' from 2013 Stress Tests: Credit Suisse

NEW YORK ( TheStreet) -- "U.S. bank capital strength is high and improving," which should bode well for investors following the latest round of Federal Reserve stress tests, according to Credit Suisse analyst Moshe Orenbuch.

The Federal Reserve will release the results of its 2013 stress tests on the largest 19 U.S. bank holding companies on Thursday. On March 14, the regulatory will release the results of the 2013 Comprehensive Analysis and Review (CCAR), which applies the stress tests to the large banks' 2013 capital plans.

On March 14, the Fed will also announce the results of the 2013 Capital Plan Review (CapPR) for banks with total assets of over $50 billion, which are not included in the CCAR.

The stress tests gauge banks' ability to withstand a particularly nasty recession beginning this year, while remaining well-capitalized with Tier 1 common equity ratios of at least 5.0%. This year's "severely adverse scenario" includes a 4% jump in the unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

Investors can expect plenty of headlines and analysis over the next week tied to the stress tests and capital plans, but the most important date is March 14, when most of the big banking names are expected to announce dividend increases and/or new share buyback authorizations.

"Our analysis indicates that all of the 17 bank holding companies in our coverage universe will 'pass' the stress tests, Orenbuch said in a report on Wednesday. With an estimated $600 billion in losses over two years, under the Federal Reserve's severely adverse scenario, Credit Suisse estimates that the aggregate Tier 1 common equity ratio for the group of banks would decline to 7.8% from 11.3%.

That leaves quite a bit of room for returns of capital to investors.

Including dividends and share repurchases, Orenbuch estimates that the 17 banks subject to CCAR covered by his firm will increase their total capital return to 64% of earnings from 36% in 2012, "with a median dividend payout ratio of 24% versus 21% in 2012."

The Fed continues to limit banks' dividend payouts to roughly 30% of earnings, so stock buybacks are expected to make up the bulk of the banks' capital return plans. Buybacks offer companies much more flexibility than dividends, as we saw last May, when JPMorgan Chase (JPM) suspended share buybacks in the wake of large hedge trading losses within its Chief Investment Office.

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