The financial sector is getting a big boost today, with gains that are mirroring the Dow Jones Industrial Average's heroic climb to new heights. With the release of the Federal Reserves stress test results for the nation's banks, investors are getting excited and striking while the iron is hot. So far in trading, Bank of America (NYSE: BAC ) is leading the pack with a 2% gain in share price.
A look around the field
As we get closer to the Fed's reveal, most bank stocks are heading north on analysts' confidence that the majority of banks will pass the stress test easily.
||Price Gain Today*
|Bank of America
|Citigroup (NYSE: C )
|JPMorgan (NYSE: JPM )
|Wells Fargo (NYSE: WFC )
Source: Yahoo! Finance. *As of 2 p.m.
Since Bank of America may have the least wiggle room of the bunch when it comes to increasing its dividend, a positive result from the stress test could send the shares further north as trading continues. Citigroup is also seen as toeing the line along with B of A on the dividend front, and it may have an improved gain by the end of the day. Wells and JPMorgan are expected to pass the stress test handily as both have been strong performers since the financial crisis -- neither is expected to have issues with approval for dividends or share buyback plans.
The result of the stress test will be one more piece added back to the investor confidence puzzle for Bank of America. The bank has been consistently adding to its capital reserves, increasing its focus on customer service, and expanding its small-business lending in an effort to regain its stature as a leading bank in the U.S. With many investors still weary about its ability to maintain capital and produce income, the stress test should give some assurance by showing top regulators' belief that Bank of America is back on its game.
A look ahead
Since the Fed will be giving the banks the details of their first round of stress test results today, many of the banks are considering announcing their plans to distribute capital to shareholders ahead of next week's second round of results. Next week's results will primarily focus on the Fed's assessment of a bank's ability to withstand capital disbursements and share buybacks. Any announcement by the banks regarding increased dividends or share repurchases will be against the wishes of the Fed, a risky proposition, but they believe their plans will be leaked if they stay mum until next week.
If the banks do make their announcements ahead of schedule, investors should keep an eye out for more gains prior to next Thursday, though any news from Bank of America may be taken with a grain of salt until its ability to distribute capital to shareholders is confirmed by the Fed.
With seemingly positive news on the way, Bank of America's stock performance may surpass it's 2012 results, when it doubled. But, with significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.