Big-Bank Stock Buybacks Should Be Much Higher in 2014

NEW YORK (TheStreet) -- Following an expanded round of annual Federal Reserve bank stress tests in March, investors can expect to see most large-cap U.S. banks announce significant increases in deployment of excess capital through share buybacks and dividend increases.

The stress tests are actually a two-part process, which will be expanded to a group of 30 banks in March, from the group of 18 large-cap banks tested over the previous few years.  First, the banks' third-quarter financials are tested using a "severely adverse" economic scenario developed by the Federal Reserve. Results of these tests are released in early March. The banks are gauged for their ability to remain well-capitalized, with minimum Tier 1 common equity ratios of 5% through the end of 2015, under a "severely adverse" economic scenario.

The second part of the annual stress test process is the Comprehensive Capital Analysis and Review (CCAR). The big banks must submit their annual plans to deploy excess capital through dividends, share buybacks and acquisitions by early January. These plans are then included in another round of stress tests, before the Federal Reserve decides whether or not to approve the capital deployment plans. The Fed announces second set of results a week after the first set of results is announced.

Following the last round of stress tests, BB&T (BBT) of Winston-Salem, N.C. and Ally Financial had their capital plans rejected, while JPMorgan Chase (JPM) and Goldman Sachs (GS) received "conditional" approval of their plans to deploy excess capital, although both companies were required to submit revised capital plans, which were accepted by the Federal Reserve last week.

The stress tests and CCAR have turned the second half of March into "dividend season" for bank stock investors, since most companies subject to the stress tests will announce dividend increases and/or share buybacks the same day the Fed announces its CCAR results.

KBW's analyst team, led by Brian Kleinhanzl, on Thursday published a report featuring a revised set of estimates for financial holding companies subject to CCAR, based on a set of "very conservative" assumptions, (the italics are KBW's).  The firm's analysis is "better suited to highlight banks at risk of lower capital returns, relative to our expectations, versus higher returns," Kleinhanzl wrote. 

Kleinhanzl expects that "a few banks may fall short of passing the capital plan review" because of a concern by the Federal Reserve over the quality of the capital plans, as opposed to the capital levels and earnings estimates on which the banks' plans will be based.  Still, out of 22 companies subject to CCAR covered by KBW, all but four are expected to receive approval to increase their capital deployments next year.

Here are the four banks KBW estimates will lower their return of capital to investors, for the period running from the second quarter of 2014 through the first quarter of 2015, which we will call "2014," from the firm's estimate for the current period running from the second quarter of 2013 through the first quarter of 2014, which we'll call "2013":

  • Fifth Third Bancorp (FITB) of Cincinnati: Common-share dividend payout of $452 million plus $600 million in share buybacks, for a total 2014 capital return of $1.052 billion, declining from $1.163 billion in 2013.
  • Goldman Sachs (GS): Common-share dividend payout of $1.153 billion plus $4.614 billion in share buybacks, for a total 2014 capital return of $5.767 billion, declining from $5.893 billion in 2013.
  • KeyCorp (KEY): Common-share dividend payout of $254 million plus $456 million in share buybacks, for a total 2014 capital return of $710 million, declining from $746 million in 2013.
  • Regions Financial (RF) of Birmingham, Ala.: Common-share dividend payout of $278 million plus $330 million in share buybacks, for a total 2014 capital return of $608 million, declining from $647 million in 2013.
Investors have grown quite used to seeing dividend and buyback increases each March over the past few years, so it will be very interesting to see the reaction, following a two-year bull market for bank stocks, if some banks plan to deploy less capital next year.

Here are the seven big banks where KBW expects to see increases of more than 50% in returns of capital to investors in 2014 (the second quarter of 2014 through the first quarter of 2015) from 2013 (the second quarter of 2013 through the first quarter of 2014):

  • Citigroup  (C): Dividend payout of $594 million plus $7.686 billion in share buybacks, for a total 2014 capital return of $8.279 billion, increasing from just $121 million in 2013.
  • Capital One Financial (COF): Common-share dividend payout of $801 million plus $2.0 billion in share buybacks, for a total 2014 capital return of $2.801 billion, increasing 123% from $1.259 billion in 2013.
  • Bank of America (BAC): Common-share dividend payout of $2.599 billion plus $5.140 billion in share buybacks, for a total 2014 capital return of $7.739 billion, increasing 81% from $4.270 billion in 2013.
  • Zions Bancorporation (ZION) of Salt Lake City: Common-share dividend payout of $52 million, less a net issuance of $2 million in common shares, for a total 2014 capital return of $50 million, increasing 78% from $28 million in 2013.
  • SunTrust STI of Atlanta: Common-share dividend payout of $318 million plus $569 million in share buybacks, for a total 2014 capital return of $878 million, increasing 74% from $504 million in 2013.
  • Wells Fargo (WFC): Common-share dividend payout of $6.816 billion plus $5.563 billion in share buybacks, for a total 2014 capital return of $12.379 billion, increasing 69% from $7.325 in 2013.
  • BB&T. Common-share dividend payout of $724 million plus $462 million in share buybacks, for a total 2014 capital return of $1.186 billion, increasing 55% from $767 million in 2013.
For JPMorgan Chase, KBW estimates a 25% increase in total capital return to $11.138 billion next year, including $6.098 billion in common-share dividends and $5.04 billion in common-share buybacks.

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

>Contact by Email.

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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