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Bank Stocks Hit Multi-year Highs on Fed, Dividend Hopes

NEW YORK (TheStreet) --U.S. bank stocks continued surging Thursday on what analysts said was continued optimism over a reduction in the Federal Reserve's bond buying program and expectations of imminent dividend hikes and share buyback announcements.

Bank of America shares were up 1.89% to $17.77. JPMorgan shares were higher by 2.42% to $59.77. Wells Fargo shares were up 1.79% to $48.67 and Citigroup shares were up 2.1% to $49.97. All of those banks except Citigroup hit new multi-year highs.

"People want to buy banks of the basis that they will benefit from rising rates at some point in time," said Atlantic Equities analyst Richard Staite in an interview Thursday.

Rising interest rates allow banks to earn more money in their bread and butter business of borrowing short and lending long. What's more, it takes depositors a long time to demand higher interest rates on their money, so banks can put that money to work either by investing it or lending it out at no cost.

Rates are expected to rise because the Fed, under new chairwoman Janet Yellen announced it would cut back its monthly purchases of Treasury bonds and mortgage-backed securities by $10 billion--to $55 billion.

Another factor may be the expectation that banks will gain approval to raise dividends and buy back shares, argues Rafferty Capital Markets analyst Dick Bove, also interviewed Thursday. The Federal Reserve will announce the results of its annual "stress tests" Thursday, while on March 26 banks will be able to raise dividends and buy back shares following the Fed's review of their plans to do so, known as the Comprehensive Capital Analysis and Review.

In the case of Bank of America, for example, Bove believes it will rise to at least 5 cents per quarter from its current level of a penny. He also believes $500 million worth of buybacks for the bank "would not be unexpected."

Must Read: Could Citigroup Have the Stress-Test Hiccups?

Bove has never been a fan of buybacks as he believes banks always buy back shares at exactly the wrong time.

"I think they're terrible. I think banks should never do them. But in terms of thinking about whether the stock is going to react favorably or negatively to buybacks, it always reacts favorably," the analyst said. "Everybody disagrees with me and I sit over in the idiot corner."

--Written by Dan Freed in New York

Follow @dan_freed

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

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