Bank of America, Citigroup, and Capital One's Under-Reported Good Omen

January's reading of the Consumer Price Index came in ahead of expectations, up 1.4% year over year, with "core" inflation (less energy and food prices) at 2.2%, above the Federal Reserve's 2% target. But there is no pleasing equity traders on Friday, with the S&P 500 (^GSPC 1.20%) and the Dow Jones Industrial Average (^DJI 0.69%) down 0.16% and 0.32%, respectively, at 12:27 p.m. ET. The culprit could be the price of oil, which is down 3.4%; Energy is the worst-performing sector in the S&P 500.

From one underperforming sector to another...despite the having had a good week, financials remain the worst-performing sector in S&P 500 year to date, trailing the index by roughly 6 percentage points. However, an event that went largely unnoticed this week suggests a potential catalyst for gains in top banks' shares could emerge within the next few weeks.

The Federal Reserve, Washington, D.C. Image source: The Motley Fool.

On Wednesday, Capital One Financial Corp. announced that the Federal Reserve did not object to the lender's proposal to add $300 million to its share repurchase authorization.

Almost a year ago, on March 11, 2015, Capital One confirmed that the Fed had given the go-ahead to its capital plan, which included a $3.125 billion share repurchase program authorization beginning in the second quarter of 2015 through the second quarter of this year and a 33% increase in its dividend to $0.40.

The review of the capital plan by the Fed was part of an annual ritual that grew out of the credit crisis: The Comprehensive Capital Analysis and Review (CCAR), which has 28 of the country's largest bank-holding companies modeling how their capital positions would hold up under adverse economic scenarios (thus, CCAR's more popular designation, the "stress tests").

On the basis of their earnings, some of these institutions could certainly stand to raise their dividend or their repurchase authorizations (or some combination of both). In that regard, the two most conspicuous names are Bank of America and Citigroup. The following table illustrates this point with a comparison with their nearest rival, JPMorgan Chase:

Data source: Bloomberg and S&P Dow Jones Indices.

Now, there was certainly a rationale for the Fed to treat B of A and Citi differently than JPMorgan in the immediate post-crisis period: JPMorgan did not suffer a single quarter of losses during the crisis (it took a whale to achieve that). B of A and Citi, on the other hand, were poster children for the damage wrought by the credit crisis. That taint has lingered -- with investors and regulators.

Nevertheless, the news from Capital One suggests the Fed may now be ready to loosen its stance. Bank of America and Citigroup are probably due for an "upgrade" from the Fed; increased buybacks and, particularly, a normalization of their dividend would be a salve to B of A and Citi's battered shares. Results from this year's stress tests will likely be released in March.