Here's Why Bank of America and Friends Popped Today

The market at large may have been a bit sleepy today, but the banking sector was jumping on the eve of some big news.

Mar 5, 2014 at 5:05PM

Bank
Though the larger market was a bit sluggish following yesterday's recovery rally, the nation's top banks are enjoying a bit of investors' love. Confidence surrounding an upcoming hurdle for the banks may be spurring on the industry's quick jump.

Happy days
So far in trading, Bank of America (NYSE:BAC) is surging ahead, with a 3.17% gain as of 4 p.m. ET. The clear leader of the pack, the Charlotte, N.C.-based bank's gain is more than double than that of its closest rival, JPMorgan Chase, with a solid 1.57% rise. BB&T (NYSE:BBT) and Citigroup (NYSE:C) were above the 1% mark with 1.19% and 1.15%, respectively, while Wells Fargo (NYSE:WFC) rounded out the group with a gain of 0.87%.

Investors may be feeling increased confidence in the nation's biggest financial institutions and their ability to pass the Federal Reserve's stress tests. Results for the initial tests are expected to be released in the next few days, with the regulator's capital review results following later in the month.

Tougher, stronger
Though the various scenarios used in the Fed's tests are reportedly much tougher than last year, investors know that the banks have shored up their capital reserves accordingly. Based on the results from last year, there was no shortage of capital on hand -- and investors are probably expecting the same thing this time around.

The explanation for Bank of America's impressive climb this afternoon is likely due to the recent amendment to Berkshire Hathaway's (NYSE:BRK-B) $5 billion investment. With regard to the $2.9 billion position Berkshire holds in the bank's preferred shares, the amendment makes the necessary revisions to allow the shares to be considered Tier I capital.

Not only does that add a $2.9 billion chunk to Bank of America's capital reserve tally, but the all-important Tier I capital ration is boosted by 22 basis points to 12.66%. The jump would help the bank significantly, as its performance in 2013 saw a strong 11.4% capital ratio drop by 40% under the test's highest stress scenario:
Bac Ccar

Source: Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results.

Any buffer that Bank of America can add against the stressed conditions in the test will be welcomed by investors -- as we already saw in today's gains.

This is only a test
Though it's exciting to see such confidence in the nation's banks right before the test results are released, there's no real point in expecting much more in terms of gains. Though there's little likelihood that any of the banks mentioned above will fail the Fed's review (only one bank did in 2013), the results are unlikely to make a big splash in the market once released -- investors are already expecting good news.

But for Bank of America and its compatriots, the approval of their capital plans later this month will provide another chance for investors to express their confidence. But without a monster dividend from the bank or another big surprise, don't worry about watching for more big jumps like today's.

The little secret at big banks
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Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and owns shares of Berkshire Hathaway and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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