NEW YORK (TheStreet) -- Investors may see a big boost for the largest U.S. banks' shares after the conclusion of so-called stress tests next month.
The Federal Reserve will announce the results of the annual stress tests on March 7. The regulator will publish the Comprehensive Analysis and Review (CCAR) on March 14.
The CCAR is the key item for investors because it's the Federal Reserve's analysis of banks' plans to return money to investors through dividends and share buybacks. And this year promises to be sweeter than last year for two reasons: First, most of the big banks all had higher capital ratios (the percentage of a bank's capital to its risk-weighted assets). Second, banks this year are receiving feedback from the Fed during the CCAR process, allowing them to lower their capital-return plans to gain immediate approval.
Last March, Citigroup C , SunTrust STI and Fifth Third Bancorp FITB had their initial capital plans rejected during the CCAR and had to wait until August to receive approval on their revisions. Of those three, only Fifth Third was approved for a dividend increase. Neither Citigroup nor SunTrust tried again last year for a dividend increase.
This year, banks have been free to push the envelope for initial capital plans, knowing they could immediately scale back their requests without waiting another five months for approval.
Citigroup and Bank of America BAC are each paying a nominal quarterly dividend of just $0.01 a share, and didn't buy back any shares during 2012. With both companies continuing to go through major transitions, opinion is mixed on the level of capital returns investors can expect this year.
JPMorgan Chase analyst Vivek Juneja, in a report Jan. 15, estimated that Citigroup would be approved to increase its quarterly dividend to $0.20 and that Bank of America would raise its quarterly dividend to $0.04. Juneja also estimated that Citigroup would be approved to repurchase $4.425 billion in common shares through the first quarter of 2014, while Bank of America would be approved to buy back $3.950 billion worth of shares.
Oppenheimer analyst Chris Kotowski, in a Feb. 4 report, said he "would counsel investors to have guarded expectations for the two companies' capital returns, as "the industry's recent history suggests that the banks get let out of the penalty box only very slowly." Kotowski estimates that Citigroup will be approved to raise its quarterly dividend to $0.10 and that Bank of America will raise its dividend to $0.03, with neither company being approved for any buybacks through the first quarter of 2014.
Large Regional and Trust Banks
UBS analyst Greg Ketron said in a report on Monday that last year's stress tests "proved to be a positive catalyst for the group, outperforming the S&P 500 by 4% in the days following the capital-plan announcements."
"With the exception of BBT and PNC (due to acquisitions), each bank is coming into this test with higher Tier 1 common ratios vs. last year's test," Ketron wrote. The analyst expects "the trust banks (STT, BK), USB and BBT will be in position to be the most active in share repurchases."
The bulk of the capital returns will be through share buybacks, with dividend payouts being capped at roughly 30% of operating earnings.
For shareholders focused on dividends, Ketron estimates that BB&T BBT "will increase its dividend yield to 3.2% assuming about a 30% dividend payout ratio and believe the company could potentially increase its dividend by more." For U.S. Bancorp USB , Ketron estimates "a 2.9% yield at a 30% payout."
"These are lower-risk banks with above-average growth rates (we project about 10% EPS growth per year for both banks over the next two years)," Ketron wrote. The analyst added that Wells Fargo WFC and PNC Financial Services Group PNC "could also push dividend yields to around 3%."
Here's a quick roundup of UBS's expectations for returns of capital for eight regional and trust banks subject to CCAR:
- Regions Financial RF of Birmingham, Ala. Last year saw a major transition for Regions, with the sale of its Morgan Keegan brokerage unit, a common equity raise and repayment of government bailout funds. UBS estimates that the company will raise its quarterly dividend to $0.06 from $0.01, and be approved to repurchase $390 million worth of common shares through the first quarter of 2014.
- SunTrust STI of Atlanta. The company took strong measures during the third quarter to strengthen its balance sheet, through the sale of its stake in Coca-Cola KO , bulk loan sales and transfers to held-for-sale. UBS estimates SunTrust will raise its dividend to $0.18 from $0.05, while also being approved for $440 million in share buybacks.
- State Street STT of Boston. UBS estimates the company will raise its dividend to $0.2575 from 24 cents, while also being approved for buybacks totaling $1.750 billion.
- U.S. Bancorp of Minneapolis. UBS estimates the company will be approved to raise its dividend to $0.245 from $0.195, while buying back $2.342 billion in shares.
- Wells Fargo. UBS estimates the company will raise its dividend to $0.2775 from $0.25 and be approved for $4.400 billion in share repurchases.
- BB&T of Winston-Salem, N.C. UBS estimates the company will raise its dividend to $0.24 from $0.23, while buying back $750 million worth of shares.
- PNC Financial Services Group of Pittsburgh. UBS estimates that PNC will be approved to raise its dividend to $0.50 from $0.40, with no share buybacks through the first quarter of 2014.
- Bank of New York Mellon BK . UBS estimates the company will increase its dividend to $0.16 from $0.13, while being approved for share repurchases totaling $1.370 billion.
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