3 Banks Ready to Repay Uncle Sam

NEW YORK ( TheStreet) -- Investors are looking for most of the large stress-tested banks to increase their dividend payouts and authorize share buybacks after the Federal Reserve announces the results of its stress tests Tuesday afternoon, but there are three large holding companies hoping for permission to repay federal bailout funds.

The Fed is set to publicly disclose an unusually detailed set of stress test results today at 4:30, with most of the largest U.S. bank holding companies having submitted plans that include an increased return of capital to investors, through higher dividends and share buybacks.

In order to gain the Fed's permission for an increased return of capital to investors, the banks need to prove that they could maintain Tier 1 common equity ratios of at least 5%, while increasing their return of capital and suffering through a dire economic scenario that includes real GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20 percent through the end of 2013."

That's a whopper of a stress test scenario, which also assumes "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012."

So investors can be pretty sure that the Fed won't have to change its mind about approving any dividend increases or share buybacks.

JPMorgan Chase ( JPM) on Tuesday announced that the Federal Reserve "not object to the Firm's proposed capital distributions submitted pursuant to" the stress tests, and that it would raise its quaterly dividend payout by a nickel, to 30 cents a share.

JPMorgan also said it had "authorized a new $15 billion equity repurchase program, of which up to $12 billion is approved for 2012 and up to an additional $3 billion is approved through the end of the first quarter of 2013."

JPMorgan CEO James Dimon said the company was "pleased to be in a position to increase our dividend and to establish a new equity repurchase program," and expected "to generate significant capital and deploy that capital to the benefit of our shareholders." The company said the timing of the buybacks "will be consistent with the Firm's capital plan and will depend on various factors, including market conditions."

Bank of America ( BAC) didn't include plans to increase dividends or authorize buybacks as part of its stress test submission to the Federal Reserve.

The Wall Street Journal reported Tuesday afternoon that Bank of America had also passed the stress tests, no doubt causing investors to breathe a sigh of relief, as the stress tests included hypothetical mortgage putback losses, based on the real information provided by the holding companies and factoring in that brutal additional 20% housing price drop included in the adverse economic scenario.

KBW's bank research team on Monday had said in a report that out of the 24 bank holding companies subject covered by the firm and subject to the stress tests, "most will weather the storm," with Basel I Tier 1 common equity ratios above 5% under the stress test scenario, except for Bank of America, which could wind up with an estimated Tier 1 common ratio of 4.66%, and Regions Financial, which could end up with an estimated Tier 1 common ratio of just 4.06%.

Shares of M&T Bank ( MTB) of Buffalo, N.Y., closed at $81.15 Monday, returning 7% year-to-date, following a 9% decline during 2011.

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M&T is trading for 2.3 times tangible book value, according to HighlineFI and 12 times the consensus 2012 EPS estimate of $6.69, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $7.40.

The company owes $230 million in federal bailout money received through the Troubled Assets Relief Program, or TARP, in December 2008, plus an additional $151.5 million in TARP money that was originally provided to Provident Bancshares, which M&T acquired in May 2009.

M&T currently pays a quarterly dividend of 70 cents, for a yield of 3.44%. In light of the company's need to repay TARP, KBW analyst Matthew Clark sees no dividend increase for M&T this year, and no buybacks.

It remains to be seen whether or not the Fed will approve M&T's exit from TARP without a dilutive common equity raise.

JPMorgan analyst Steven Alexopoulos on Tuesday said he expected M&T to pass the stress tests "with the thinnest cushion," although the company's strong earnings provides some cushion against hypothetical losses. The analyst said that an equity raise for M&T to exit TARP "could still be a possibility," but also pointed out that "thus far MTB has repaid $700 million in TARP," and "did not issue common equity in conjunction with this partial repayment."

Interested in more on M&T Bank? See TheStreet Ratings' report card for this stock.

Shares of Zions Bancorporation ( ZION) of Salt Lake City closed at $18.71 Monday, returning 15% year-to-date, following last year's 33% drop.

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The shares trade just below book value and for 13 times the consensus 2012 EPS estimate of $$1.43. The consensus 2013 EPS estimate is $1.79.

The company owes $1.4 billion in TARP money.

KBW analyst Brian Klock said on Monday that he believed "investors may be expecting ZION to seek approval of TARP repayment with no common raise in 2012," and that the company's management has made a strong case to do just that, "thus, if regulators require a common raise larger than management feels is necessary, ZION may decide to appeal the decision and to instead elect to delay the TARP repayment."

A public appear against a possible decision by the Fed to require a common equity raise for Zions to repay TARP, would be quite an event to watch.

Klock said that KBW was "modeling a $350 million common equity raise," and that consensus earnings estimates factored in "anywhere from $350-500 million in common equity raised in connection with the repayment."

Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for this stock.

Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $5.63 on Monday, returning 31% year-to-date, after falling 38% during 2011.

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The shares trade for 0.9 times tangible book value and for 13 times the consensus 2012 EPS estimate of 45 cents. The consensus 2013 EPS estimate is 71 cents.

Regions owes $3.5 billion in TARP money.

Part of the TARP repayment money will come from the sale by Regions of its Morgan Keegan subsidiary to Raymond James Financial ( RJF) for "total consideration of $1.18 billion," which is expected to close late this month.

KBW analyst Jefferson Harralson said on Monday that the company's "capital plan and the Fed's ultimate results will allow for RF to repay its $3.54B in outstanding TARP," but that the company "has a $1.6B cash shortfall as it looks to repay this amount while maintaining its desired two-year cash reserves."

Harralson expects Regions to take advantage of the recent run-up in its shares, by raising $1 billion in common equity through a public offering, "with the remainder of the gap to be filled through the up-streaming of cash from the bank to the hold-co, or potentially through a small, temporary debt issuance."

Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 3 Banks Ready to Repay Uncle Sam portfolio on Stockpickr.


-- Written by Philip van Doorn in Jupiter, Fla.

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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.