NEW YORK (TheStreet) -- Following an expanded round of annual Federal Reserve bank stress tests in March, investors can expect to see most large-cap U.S. banks announce significant increases in deployment of excess capital through share buybacks and dividend increases.
The stress tests are actually a two-part process, which will be expanded to a group of 30 banks in March, from the group of 18 large-cap banks tested over the previous few years. First, the banks' third-quarter financials are tested using a "severely adverse" economic scenario developed by the Federal Reserve. Results of these tests are released in early March. The banks are gauged for their ability to remain well-capitalized, with minimum Tier 1 common equity ratios of 5% through the end of 2015, under a "severely adverse" economic scenario.
Following the last round of stress tests, BB&T (BBT) of Winston-Salem, N.C. and Ally Financial had their capital plans rejected, while JPMorgan Chase (JPM) and Goldman Sachs (GS) received "conditional" approval of their plans to deploy excess capital, although both companies were required to submit revised capital plans, which were accepted by the Federal Reserve last week. The stress tests and CCAR have turned the second half of March into "dividend season" for bank stock investors, since most companies subject to the stress tests will announce dividend increases and/or share buybacks the same day the Fed announces its CCAR results.
KBW's analyst team, led by Brian Kleinhanzl, on Thursday published a report featuring a revised set of estimates for financial holding companies subject to CCAR, based on a set of "very conservative" assumptions, (the italics are KBW's). The firm's analysis is "better suited to highlight banks at risk of lower capital returns, relative to our expectations, versus higher returns," Kleinhanzl wrote.
Kleinhanzl expects that "a few banks may fall short of passing the capital plan review" because of a concern by the Federal Reserve over the quality of the capital plans, as opposed to the capital levels and earnings estimates on which the banks' plans will be based. Still, out of 22 companies subject to CCAR covered by KBW, all but four are expected to receive approval to increase their capital deployments next year.
Here are the four banks KBW estimates will lower their return of capital to investors, for the period running from the second quarter of 2014 through the first quarter of 2015, which we will call "2014," from the firm's estimate for the current period running from the second quarter of 2013 through the first quarter of 2014, which we'll call "2013":
- Fifth Third Bancorp (FITB) of Cincinnati: Common-share dividend payout of $452 million plus $600 million in share buybacks, for a total 2014 capital return of $1.052 billion, declining from $1.163 billion in 2013.
- Goldman Sachs (GS): Common-share dividend payout of $1.153 billion plus $4.614 billion in share buybacks, for a total 2014 capital return of $5.767 billion, declining from $5.893 billion in 2013.
- KeyCorp (KEY): Common-share dividend payout of $254 million plus $456 million in share buybacks, for a total 2014 capital return of $710 million, declining from $746 million in 2013.
- Regions Financial (RF) of Birmingham, Ala.: Common-share dividend payout of $278 million plus $330 million in share buybacks, for a total 2014 capital return of $608 million, declining from $647 million in 2013.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV