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An Unpleasant Surprise Lurked in the Banking Sector This Week

Several days ago, a certain Fool contributor who shall remain nameless opined that this would probably be a quiet week for banks. Bzzzt, wrong!

Wrong by $4 billion and change, as it turns out. This past Monday, Bank of America (NYSE: BAC  ) rocked the sector -- and the broader stock market -- when it dropped a bomb. The company announced that it was suspending its planned share buyback program (the $4 billion) and dividend payments, effective immediately, upon request from the Federal Reserve Board.

Bank of America, it turns out, overstated certain capital figures for 2013. Although the company says this will have no impact on its historical results or its shareholder equity, the incident raises concerns that the firm might have missed some other important, erm, details in recent times.

The klutzy lender now replaces Citigroup (NYSE: C  ) , as the dog of the nation's big four banking stocks. Citi was one of only five (out of 30) financial institutions to have its capital allocation proposals objected to by the Fed in its Comprehensive Capital Analysis and Review handed down in March. However given recent events (not to mention a good Q1 from Citi), that bad news is starting to fade somewhat.

The spirits of both banks, in addition to those of JPMorgan Chase (NYSE: JPM  ) , Goldman Sachs, and Deutsche Bank, could be lifted by participating in a big-ticket deal in the near future. Bloomberg reported this week that in April, Sprint (NYSE: S  )  approached those firms (plus Mizuho Financial Group) to discuss financing for a potential Sprint bid for rival T-Mobile US. Watch this space for developments.

In contrast to denied Citigroup and accident-prone Bank of America, Wells Fargo (NYSE: WFC  ) is forging ahead with its own capital distribution plans, thank you very much. The company made its planned dividend hike official this week, formally declaring a $0.35 per share common stock payout.

This is to be distributed June 1 to stockholders of record as of May 9. It's a $0.05 (or 17%) lift from the previous dividend of $0.30, and shareholders will be happy to get it. They'll also be hoping to benefit from Wells Fargo's ambitious expansion of its share buyback program, for which the bank recently authorized the purchase of an additional 350 million of its own shares. 

The company seems to be feeling rather flush these days. Perhaps as a result, yesterday it announced its goal to lend $100 billion to small businesses (those with 20 or fewer employees) between now and the end of 2018. That's proportionally more than it handed out to such entities between 2011 and 2013, and it's encouraging to see a big lender opening its wallet a little wider for that segment of the economy.

So in contrast to certain predicitions, this week did turn out to be quite eventful. Not quite in the positive way banking investors would have liked, though. Fingers crossed that the next big surprise from the sector is of the pleasant variety.

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Eric Volkman

Eric has been writing about stocks and finance since the mid-1990s, when he lived in Prague, Czech Republic. Over the course of a varied career, he has also been a radio newscaster, an investment banker, and a bass player in a selection of rock and roll bands. A native New Yorker, he currently lives in Los Angeles.

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9/4/2015 4:01 PM
BAC $15.65 Down -0.29 -1.82%
Bank of America CAPS Rating: ****
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Wells Fargo CAPS Rating: *****
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