2 Things That Could Move Financials Today

NEW YORK ( TheStreet) -- The Federal Reserve will hold its monthly FOMC meeting on Tuesday when investors will be looking for more commentary on the economy, but for bank stock investors the real fun is on Thursday.

The Fed said in a release late Monday that it will announce the results of its annual stress test of the largest banks on March 15 at 4:30 p.m. The test will evaluate whether the country's largest banks will be sufficient capital under a hypothetical stress scenario that depicts a severe recession in the U.S. including a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices.

Each bank will have to show they can maintain the required capital level after making planned distributions in the form of dividends and buybacks under a baseline scenario and the stressed scenario developed by the bank as well as under the baseline scenario and stressed scenario developed by the Fed.

The Fed will calculate its own projections of the bank's losses, revenues, expenses, and capital ratios under severely adverse economic and financial market conditions. The Fed's estimates could vary from the bank's projections of their own performance under the hypothetical scenarios.

The Federal Reserve will be disclosing the results of its stress scenario projections, including firm-specific results based on the projections made by the Federal Reserve of each BHC's losses, revenues, expenses, and capital ratios over the planning horizon.

Analysts have been predicting the winners and losers of the stress test. JPMorgan Chase ( JPM) has emerged as the universal favorite, given its strong capital ratios and superior profitability. Analysts expect the bank's dividend yield to climb over 3% post a positive CCAR.

Bank of America ( BAC) has said it has not requested for a dividend increase. The investor focus will be on the projected capital ratios, revenues and losses in the stress scenario for the bank. In recent months, concerns on the bank's capital adequacy have abated and a positive stress test could reinforce confidence.

Citigroup ( C) could be the wildcard in the stress tests. Analyst estimates of Citi's capital return plans vary widely with some expecting a multi-fold increase in dividends to about 10 cents per share from 1 cent currently. Others believe the bank might have been more conservative in its requests in order to stay on track to achieving its Basel III Tier I target.

The Justice Department has finally filed the details of the mortgage settlement. Notably, Ally Financial and Bank of America will make broader concessions on principal reductions for borrowers as part of their agreements under the settlement, compared to other banks.

Bank of America will offer more than 200,000 financially strapped households the chance to reduce loan balances by an average of more than $100,000 under a "side agreement" which would allow it to avoid fines, the Wall Street Journal reported last week.

Ally's borrowers at high risk of default can reduce principal to as low as 85% of their home value. Other banks need only reduce principal to 120% of home value. Ally will also have to allow borrowers with adjustable rate mortgages to switch to a fully amortizing fixed-rate mortgage and make monthly payments that are equal to or lower than their current payments.

Ally promised to continue its obligations under the agreement even if its sells its mortgage subsidiary Rescap.

Banks will receive credits for modifying and refinancing borrowers, with more credit given for loans on their own books. They will also receive more credit for loans that are highly underwater - those with loan-to-value ratios between 140% to 174%.

--Written by Shanthi Bharatwaj in New York

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