Banks Aced Their Big Test This Week

Bank of America, Citigroup, Wells Fargo, JPMorgan Chase -- along with many of their peers -- passed the Fed's Dodd-Frank stress tests. Next up: the CCAR, with its yays or nays to dividend and share buyback requests.

Mar 21, 2014 at 2:00PM

Pass, pass, pass! That was the happy result for nearly every financial institution that underwent the Federal Reserve's Dodd-Frank stress tests, the key results of which were released yesterday.  Essentially, the tests are a series of measurements gauging how the selected companies would perform financially under a set of increasingly dire economic circumstances.

If the results are any indication, they'd do just fine. Of the 30 institutions in the Fed's examination room (up from 18 last year), only a single one -- Utah-based regional lender Zions Bancorporation (NASDAQ:ZION) -- would lack the capital to survive the Fed's worst-case economic scenario.

This, of course, provides hope that the more high-profile financials on the market will have scope to raise their dividends and/or share buyback programs. This will be determined when the Comprehensive Capital Analysis and Review (yeah, try saying that ten times fast) is released next Wednesday afternoon by the Fed. This is the second and perhaps more critical part of the tests, as it will include the Fed's approvals (or lack thereof) to the banks' capital distribution plans.

Two lenders busy biting their nails and pacing the room in anticipation are Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Investors in the two incumbents are starving for an increase in their quarterly dividends, which have stood at $0.01 per share for both firms for longer than anyone cares to remember. The chances are higher for Bank of America to get the nod for such increases, as it had an excellent year in 2013 and continues to thrive. Citigroup is doing better than it has in some time, but still has some fat to shed before it can return to meaningful growth and profitability.

Wells Fargo (NYSE:WFC) is in the Bank of America club of 2013 overachievers. Although it's been struggling with a slowdown in the mortgage market of late, it's still very far in the black in terms of bottom line and the market remains quite bullish on its prospects.  The company has admitted that it is seeking hikes in both its dividend and its share repurchase program; at this point, it'd be surprising if the Fed said no to either.

JPMorgan Chase (NYSE:JPM), for one, will have a few more coins to hand out in dividends or buybacks (assuming, of course, that it's requested a lift in either and the Fed turns on the green light). The bank finally sold its physical commodities trading unit, nearly a year after announcing it was "pursuing strategic alternatives" for the division. The buyer is Switzerland-based Mercuria Energy Group, and the price is $3.5 billion.

This weekend will be a long one for the banks. CCAR Wednesday can't come fast enough. When it does, though, expect at least a few lenders to pop open the Champagne and get good and drunk; at least a few of them should have something to celebrate.

Passing the test with flying colors
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Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo, and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. 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.

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