Bank of America: Stress Test Anticipation Winners

NEW YORK ( TheStreet) -- Bank of America ( BAC) was the winner among the largest U.S. banks on Tuesday, with shares rising 3% to close at $12.26.

The broad indexes all ended with slight gains, as the Dow Jones Industrial Average pushed into record territory for the third straight day.

The Labor Department on Thursday said initial unemployment claims for the week ended March 2 declined to 340,000 from an upwardly revised 347,000 the previous week. Economists on average were expecting new claims to come in at 352,000, according to Zacks. This is the third time in four weekly reports where levels came in below 350,000.

The four-week moving average for initial jobless claims was 348,750, declining 7,000 from the prior week's 355,750. Economists were expecting claims to rise to 355,000.

The KBW Bank Index ( I:BKX) was up over 1% to close at 56.27, as investors waited for the Federal Reserve to announce the results of its annual stress tests for the 19 largest U.S. bank holding companies, scheduled for 4:20 p.m. EST.

The stress tests gauge the big banks' ability to withstand a deep recession beginning this year, while remaining well-capitalized with Tier 1 common equity ratios of at least 5.0%. This year's "severely adverse scenario" includes a 4% increase in the unemployment rate during 2013, along with 5% negative GDP growth, a 50% decline in equity prices and a 20% decline in real estate prices.

What may be confusing for investors in this year's stress test process is the Federal Reserve's decision to hold off on announcing the results of the 2013 Comprehensive Analysis and Review (CCAR) until March 14. The CCAR applies the stress test scenarios to banks' capital plans, meaning that investors have to wait another week until the banks announce dividend increases and/or plans to buy back shares through the first quarter of 2014.

Bank of America

Shares of Bank of America have returned 6% this year. The shares returned 110% in 2012, which was only a partially recovery from an epic 58% decline during 2011. The shares are down 7% since the end of 2010.

Bank of America's stock trades for 0.9 times tangible book value, and for 9.5 times the consensus 2014 earnings estimate of $1.29 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.00.

Bank of America managed to increase its Basel I Tier 1 common equity ratio to 11.06% as of Dec. 31, from 9.86% a year earlier, despite relatively weak 2012 earnings of $4.188 billion, or $0.25 a share. The company also estimated a Basel III Tier 1 common equity ratio of 9.25% as of Dec. 31, putting it in compliance with the Federal Reserve's proposed capital rules, six years ahead of the January 2019 deadline.

Bank of America currently pays a nominal quarterly dividend of $0.01 a share, and didn't request Federal Reserve approval for a dividend increase or any buybacks last year.

Credit Suisse analyst Moshe Orenbuch in a report on Wednesday said he expected all 17 large bank holding companies covered by his firm to "pass" the stress tests, and estimated that the group would increase its total capital return this year to 64% of earnings from 36% in 2012.

Credit Suisse estimates Bank of America will pay total dividends of $0.07 a share during 2013, while being approved for $753 million in share buybacks, for a total capital return of $1.559 billion.

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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 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.