Please ensure Javascript is enabled for purposes of website accessibility

Why June Will Be a Big Month for Bank Stocks

By John Maxfield - Feb 5, 2016 at 4:38PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

June is the month that we'll learn which of the biggest banks can (and can't) increase their dividends.


Investors don't have to wait much longer to learn which of the nation's biggest banks will get to increase their dividends and share buybacks. Image source: iStock/Thinkstock.

June has become the most important month for bank stock investors. It's the month that the Federal Reserve releases the results from both the stress test and the follow-up comprehensive capital analysis and review, the latter of which dictates which of the nation's biggest banks will be allowed to increase their dividends and/or stock buybacks.

There are 33 banks that must submit to the process this year, including the nation's four biggest banks by assets: JPMorgan Chase (JPM -0.99%), Bank of America (BAC -0.37%), Wells Fargo (WFC -1.83%), and Citigroup (C -0.28%). Beyond this, a large swath of regional banks must also request permission from the Fed to return more capital to shareholders, including PNC Financial, BB&T, and SunTrust Banks, among others.

While most of the banks that have been stress tested in the past have been allowed to boost their dividends and/or share buybacks, there have been notable exceptions. Bank of America and Citigroup in particular have struggled over the years to satisfy regulators.

In 2014, for example, Bank of America had to resubmit its capital plan and suspend planned increases in capital distributions after incorrectly reporting data in the stress-testing process. Citigroup ran into problems the same year due to "deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement," the Fed said at the time.

And last year, JPMorgan Chase was found to have capital deficiencies under the Fed's severely adverse scenario. It was accordingly required to reduce the amount of capital that it had originally proposed returning to shareholders.

It's impossible to say for sure how the nation's biggest banks will perform on the 2016 test, given that the methodology behind the test changes every year. "In adjusting the scenarios for our yearly stress testing program, we strive to assess the resilience of the nation's largest banks in a variety of potential adverse environments," Federal Reserve Governor Daniel K. Tarullo said. "It is important that the tests not to be too predictable from year to year."

This aside, it isn't unreasonable for investors to assume that most of the banks will sail through the process. One of the reasons is that banks are generating higher earnings with each passing year. JPMorgan Chase earned $24.4 billion last year, the second best year of any bank in history. And Wells Fargo, despite being roughly a third smaller than JPMorgan, produced income of $21.6 billion. It's for this reason that I believe Wells Fargo investors in particular will likely see a dividend increase coming their way.

Even Bank of America and Citigroup have seen their fortunes improve. Last year was Bank of America's best year in nearly a decade, with $14.4 billion in net income. And Citigroup's bottom line more than doubled compared to 2014, going from $7.3 billion up to $17.2 billion.

In sum, because earnings feed capital, and assessing capital adequacy is the point of the stress test and CCAR processes, it stands to reason that these banks will be allowed to return more money to shareholders simply because they're earning more of it.

Editor's note: This article originally stated that the 2016 stress test and CCAR results are due in March, but that date has been postponed by the Federal Reserve to June according to a Jan. 28 press release. We regret the error.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$47.73 (-0.28%) $0.14
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$32.19 (-0.37%) $0.12
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$116.16 (-0.99%) $-1.16
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.02 (-1.83%) $0.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.