Capital One: Federal Reserve Winner

NEW YORK ( TheStreet) -- Capital One ( COF) was the winner among the largest U.S. banks on Monday, with shares rising over 2% to close at $53.13.

The broad indexes ended with small gains, while the KBW Bank Index ( I:BKX) was up over 1% to close at 54.80, with all but two of the 24 index components ending the session higher.

Federal Reserve Chairman Ben Bernanke last week defended the central bank's "highly accommodative" monetary policy before Congress. The Fed has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008. The central bank is also purchasing $85 billion a month in long-term securities, in an effort to hold rates down. Since December, the Federal Open Market Committee has said in its monthly statements that the federal funds rate is unlikely to be raised until the U.S. unemployment rate falls below 6.5%, assuming inflation is kept in check.

Federal Reserve Vice Chair Janet Yellen in a speech on Monday said that the Open Market Committee "could decide to defer action even after the unemployment rate has declined below 6-1/2 percent if inflation is running and expected to continue at a rate significantly below the Committee's 2 percent objective."

"A decline in the unemployment rate could, for example, primarily reflect the exit from the labor force of discouraged job seekers," Yellen said.

Dividend Season for Banks


Two major upcoming regulatory events could serve as a strong catalyst in the continuing recovery for bank stocks.

The Federal Reserve on Thursday will announce the results of the 2013 stress tests on the 19 largest U.S. bank holding companies. The tests will gauge the banks' ability to withstand a " severely adverse scenario," that includes a 5% decline in real GDP this year, a 50% drop in equity prices and a 20% decline in property prices through the end of 2014. The banks need to show an ability to withstand a severe and immediate recession, while maintaining Tier 1 common equity ratios of at least 5.0%.

All of the banks being stress tested are expected by analysts to pass with flying colors, with most members of the group seeing earnings improve in 2012, with rising capital ratios as well.

March 14 is an even more important date for investors, since the Fed will announce the results of the annual Comprehensive Analysis and Review (CCAR). The CCAR applies the stress test scenarios to the banks' submitted capital plans. If last year's test results were a reasonable guide, investors can expect a flurry of announcements by banks of dividend increases, as well as authorizations to repurchase shares.

Bank of America ( BAC) and Citigroup ( C)will be closely watched, with each company currently paying a nominal quarterly dividend of just $0.01 a share. Bank of America's 2012 capital plan included no increased return of capital to investors. Citigroup's initial capital plan for 2012 included a dividend increase, but was rejected by the Federal Reserve last March. The company's revised capital plan was approved in August, but included no dividend increase or share buybacks.

Goldman Sachs analyst Richard Ramsden in a report on Monday said that "the average bank can request capital returns in line with our estimates, see its pre-provision net revenue fall 70% versus last year's stress test and still maintain 5% Tier 1 Common ratio, in our view."

Pre-provision net revenue, or PPNR, is a useful earnings gauge for banks' earnings performance, because it looks past the effect of provisions for loan losses. During the credit recovery, many banks are seeing their bottom lines boosted by the release of excess loan loss reserves that were built-up at the height of the credit crisis.

Goldman Sachs estimates that Bank of America will pay a total of $0.09 a share in dividends during 2013, while being approved for $720 million in share buybacks. For Citigroup, Goldman estimates total 2013 dividend payouts of $0.20 a share, with $2.110 billion in buybacks.

Ramsden said that Goldman was "most optimistic relative to the Street" on Capital One, Discover Financial Services ( DFS) and Northern Trust ( NTRS), "on post-CCAR dividends."
  • Capital One currently pays a quarterly dividend of $0.05. The company made two major acquisitions of ING Direct (USA) and HSBC's (HBC) U.S. credit card portfolio during 2012, and is therefore not expected to request approval for share buybacks this year. However, Ramsden estimates Capital One will raise the quarterly dividend to $0.2375.
  • Discover currently pays a quarterly dividend of $0.14, for a yield of 1.41%, based on Monday's closing price of $39.76 Ramsden estimates that Discover will raise the dividend to $0.185 a share, and buy back $1.857 worth of shares during 2013.
  • Northern Trust of Chicago currently pays a quarterly dividend of $0.30, for a yield of 2.23%, based on Monday's closing price of $53.82. Ramsden estimates that the bank will raise the dividend to $0.35, while also buying back $390 million in shares this year.

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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.

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