Discover, Fifth Third Are Well-Positioned for Higher Payouts After Stress Tests

NEW YORK (TheStreet) -- Discover Financial Services (DFS) and Fifth Third Bancorp (FITB) should be very well-positioned for higher payout ratios following the Federal Reserve's stress tests and capital plan reviews, according to Janney Capital Markets analyst Sameer Gokhale.

The Federal Reserve will announce the results of its annual stress tests on March 20.  The stress tests will gauge 30 large bank holding companies' ability to remain well-capitalized, with minimum Tier 1 common equity ratios of at least 5% through a "severely adverse" economic scenario.

This year's scenario assumes an increase in the U.S. unemployment rate of four percentage points, with the unemployment rate peaking at 11.25% in mid-2015. The scenario also includes a decline in real U.S. GDP of nearly 4.75% through the end of 2014, a 50% decline in equity prices and a 25% decline in home prices.

Then on March 26, the Fed will announce the results of the annual Comprehensive Capital Analysis and Review (CCAR), through which the regulator incorporates banks' plans to deploy excess capital through dividend increases, share buybacks and acquisitions.

Please see Banks' Excess Capital Is 'Absolutely a Reality' for a discussion on why most of the banks subject to the stress tests and CCAR are expected to pay out a significantly higher percentage of earnings this year than they did during 2013.

According to Gokhale's estimates, Discover and Fifth Third will come though the stress tests showing respective minimum Basel III Tier 1 common equity ratios of 8.95% and 7.30%.  "We believe that FITB and DFS should be able to justify higher payout ratios because they should have higher capital ratios than the fully phased-in 7% Common Equity Tier 1 ratio under the severely adverse scenario," Gokhale wrote.

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