Just about everyone is waiting with bated breath to hear how some of the biggest banks make out when the Fed's stress test results are released tomorrow, with the Comprehensive Capital Analysis and Review outcomes to follow one week later. For investors, the latter metric is of particular importance since it will determine which banks can return capital to investors -- and which can't.
Analysts have been weighing in on that very issue, and the consensus of opinion doesn't look great for either Bank of America (NYSE:BAC) or Citigroup (NYSE:C). While neither bank is expected to have trouble passing the stress test, the question of dividends and stock buybacks is another matter. Most agree that, with the additional stress scenarios the government is putting on B of A, Citi, JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Wells Fargo (NYSE:WFC), the first two will have the least amount of wiggle room to return capital to shareholders.
High hopes for Bank of America
With B of A's 100% stock value rise in 2012, as well as its much plumper Basel III capital ratio of 9.3% many hope the big guy will be able to raise its dividend this year. Indeed, for both Bank of America and Citi, some analysts do feel that some capital return may be in order. Analysts at JPMorgan think B of A may be able to raise its dividend to $0.04 from the current $0.01, and Citi's divvy might increase to $0.20. Both banks may possibly be allowed to buy back approximately $4 billion in stock, as well.
Is this analyst being a little too magnanimous? Perhaps not. Though it's not a widely held view that Citi and B of A would be able to return pots of money to investors while maintaining their Basel Tier I capital ratios of 5% under the most severe of scenarios, there is some feeling that these two banks will be able to pass on a little something to their shareholders this year.
For instance, RBS Capital Markets has categorized the 18 banks undergoing the Fed testing by capital distribution, and these two institutions are in the bottom tier, with expected payout levels of only 10% to 30% of earnings. By comparison, the middle level, which includes Wells Fargo, is likely to be able to return capital at rates of between 50% and 75%, and those at the top of the heap -- JPMorgan and Goldman -- will be allowed payouts of 75% to 100% of earnings.
Though at the bottom of the heap, 10% to 30% isn't nothing. Both Citi and Bank of America are still working on their internal issues, one of which is poor earnings. Fourth-quarter results for B of A were still very low, at $0.03 per share, while Citi's $0.69 per share earnings missed estimates by $0.27. Bank of America is likely still skittish about asking the Fed to return capital to investors, and Citi will be happy to finally pass the test.
Things are looking a bit better this year for both banks, however, so it's possible that the long-suffering investors of these big banks will receive a pleasant surprise in a week's time.