These 2 Stress Tests Have Big Implications for Banks on Both Sides of the Atlantic

Two sets of results give clues about share dilution, dividends, and buybacks.

Mar 14, 2014 at 3:30PM

Source: Flickr / PhilipC.

This March is a critical month for bank investors, as it brings us the results from long awaited stress tests both in the U.S. and overseas. Dividend, value, and growth investors all have something to gain -- or lose -- based on developments this month and I'll take a look at two key sets of stress tests.

Greek banks
For the past few years, Greece has been burdened by recession and record levels of unemployment. Both this economic slowdown and a subsequent drop in property values tore huge holes in bank balance sheets, requiring a 28 billion euro bailout last year. This recapitalization left the Greek government with majority stakes in all of Greece's four major banks.

The question for 2014 has been: How much more money will these four banks need? We now have the results -- and it's time to take a look.

As expected, Eurobank requires the most additional capital at almost 3 billion euros, an amount likely to be raised as the government seeks out new private investment for the bank. Greece's largest lender, National Bank of Greece (NYSE:NBG), requires 2.2 billion euros of additional capital. Greece's other two major lenders, Alpha Bank and Piraeus Bank, require capital increases of 262 million euros and 425 million euros, respectively.

National Bank of Greece, the most accessible Greek bank for U.S. investors, was quick to respond to the stress test results noting that it will not have to issue additional shares to raise capital. This removes the looming fear of share dilution and is a strong positive for the bank. Instead of issuing shares, NBG is targeting asset sales and internal improvements to bolster its capital levels.

U.S. banks
For those not involved in Greek banks, stress tests are still coming to a market near you. The Federal Reserve has set March 26 as the date for release of stress tests for the 30 largest American banks.

American banks are in better shape than their Greek counterparts, and recapitalization forced share dilution is not considered a major risk here. Instead, investors are looking out for indications on dividends and buybacks.

Closely watched here are Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Both banks pay dividends on par with their own FDIC insured accounts. But positive stress test results could make these penny dividends a thing of the past. B of A and Citigroup are both eager to attract more dividend investors, and an increase into the 1%-2% yield range would help win some back.

Buybacks are also worth watching here. Both banks trade below book value. meaning share repurchases at these levels would help increase earnings per share and grow book value. Citigroup even trades below tangible book value, making repurchases at these levels even more accretive.

Stress filled month
Investors have already seen the results of the long awaited Greek bank stress tests and the overall positive outcome for National Bank of Greece. Now, U.S. investors await the results from the largest American banks. Investors should be on the lookout for dividends, buybacks, and capital ratios to see how they affect their investment positions.

One bank without any of the stress
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Alexander MacLennan has the following options: long, January 2015 $20 calls on Bank of America, long Bank of America Class B warrants, long January 2015 $40 calls on Citigroup, long January 2015 $45 calls on Citigroup, long January 2015 $50 calls on Citigroup, long January 2015 $7 calls on National Bank of Greece (ADR), and long December 2017 National Bank of Greece warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information