Last week, the Federal Reserve released the first part of the annual banking stress tests results, which examined the impact of a severe economic downturn on the largest U.S. banks. While almost every bank showed improvement year over year, BB&T (NYSE:BBT) posted especially encouraging results. The results highlighted the strength and sustainability of BB&T's balance sheet and loan portfolio.
How it fared last week
Despite posting a lower actual Tier 1 common ratio in Q3 in 2012 compared to 2011 because of its acquisition of Bank Atlantic and Crump Insurance, BB&T posted an impressive minimum Tier 1 common ratio of 9.4% under the severely adverse scenario. During the previous year's tests, BB&T's minimum Tier 1 common in the doom-and-gloom scenario was 7.3%. Regardless of some investors clamoring about the ease of the tests this year, it's hard to deny the improvements BB&T has made to its balance sheet and business prospects.
These strong results have driven investors to tune into the Comprehensive Capital Analysis and Review results, which will be released on Thursday afternoon. Within this release from the Fed, investors will see if the participating banks sought and received approval for any increases in dividends or share buyback programs. Investors will also get to see the impact of any new capital plans on stressed ratios.
Should BB&T request another bump?
Last year, BB&T asked and received approval for a 25% increase in quarterly dividend payments. Additionally, the Fed did not reject the company's proposal to redeem $3.2 billion of trust preferred securities. Given the substantial improvement of its balance sheet under a stressed scenario, BB&T seems to have ample leverage in negotiating any additional actions to return more cash to shareholders. The market recognizes the value of BB&T's balance sheet as shares currently trade at almost 2 times its tangible book value, well above the average in the U.S. banking industry.
While it seems that BB&T is strong enough to request a substantial increase of its dividend, I believe investors may want to temper their expectations. The Fed has explicitly said that dividend payout ratios above 30% will receive "particularly close scrutiny"; BB&T's current dividend payout ratio is hovering around the 30% level. If the Fed and the bank cannot agree on a substantial dividend increase, BB&T may request additional share buybacks, an action much easier to scale back compared to the scrutiny of cutting a dividend. Therefore, I expect BB&T to ask and receive approval for a slight dividend increase, as well as additional share repurchases.