logo
  Join        Login             Stock Quote

Banks Ready For Stress Test Results: Dividend, Share Buybacks In Focus

 March 12, 2012 02:21 PM
 


The Federal Reserve is expected to release the results of stress test on March 15, triggering investors hopes that the U.S. banks could re-visit their capital distribution strategies via dividend hikes and share repurchases.

Stress Test, or Comprehensive Capital Analysis and Review (CCAR), is a process where financial institutions would be tested to determine whether they have sufficient capital to continue operations throughout times of economic and financial stress. Top-tier U.S. banks with total consolidated assets of $50 billion or more are required to submit annual capital plans for review.

"In general, we expect few surprises as we believe overall results will reflect a still cautious Fed that favors capital accumulation over deployment. As such, we model all-in payout ratios of 40%-60%, with a slight bias towards dividends," Jefferies analyst Ken Usdin wrote in a note to clients.

[Related -Why I Like Financial Stocks For 2014]

Meanwhile, banks will be content with the dividend payout ratios in the range of 20 percent to 30 percent as more than 30 percent attracts additional regulatory scrutiny.

Usdin noted that most banks will only be able to increase their quarterly dividend by 1 cent to 5 cents. On current prices, this would mean another 40 basis point of yield for investors.

On average, the analyst expects banks to pay out 45 percent of total earnings this year, with 25 percent going towards dividends and 20 percent for share buybacks. Overall dispersion should be fairly tight given that most banks seem to be targeting 40 percent to 60 percent payout ratios in 2012.

[Related -Jobs Growth Tepid At Best]

"Longer-term aspirations are likely closer to 60%-80%, in our view, but few banks seem willing to push the envelope given that the Fed clearly favors capital accumulation at this juncture," Usdin added.

Most banks capital position are above the minimum 5 percent Tier 1 common ratio and average around 9 percent. This implies that there is excess capital in the system.

"If we assume that banks can manage to an 8.0% Tier 1 common ratio (7% minimum plus some buffer), the average bank in our universe would be able to buy back 10% of shares outstanding," Usdin said.

The analyst said banks best equipped to pay out a higher percentage of earnings this year include Comerica (NYSE:CMA), KeyCorp (NYSE:KEY), Northern Trust Corp. (NASDAQ:NTRS), State Street Corp. (NYSE:STT) and US Bancorp (NYSE:USB).

On a percentage basis, Comerica, SunTrust Banks (NYSE:STI) and US Bancorp to see the biggest increases, while, on a yield basis, Comerica, Huntington Bancshares (NASDAQ:HBAN), and USB to see the biggest increases.

On the other hand, repurchase activity is more of a gray area, given that few banks have given explicit payout hopes.

"We expect most banks to initiate buyback programs in '12, with an average payout ratio of around 20%," the analyst added.

Usdin said banks likely to initiate bigger repurchase programs include Northern Trust, State Street and US Bancorp.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageCrude Rebound

Since the price of crude oil broke below $90 per barrel in September, the Brent global benchmark has been read on...

article imageShould You Invest In The Hottest New Trend In Finance?

Thanks to major changes in regulation, social media and technology, the business of banking has undergone read on...

article imageStrong Attractor in Action Pulling S&P 500 Down

The attractor is formed by the 200-day moving average and the 50% Fibonacci retracement of the up move from read on...

article imageIs The Weak Housing Market A Warning Sign For The US Economy?

Today’s US economic releases – housing starts and business survey data for the manufacturing sector – read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

Optimism Moving Back Into The Equation
More Articles on: Finance



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.