NEW YORK (The Deal) -- Dividend-focused investors in large bank stocks will need to pay careful attention over the next few weeks to the results of annual stress tests on the largest 31 financial institutions, those with at least $50 billion in assets. The Federal Reserve is asking the big banks to make sure they have sufficient capital buffers to withstand a hypothetical "deep and prolonged" recession in which the unemployment rate peaks at 10% in the middle of 2016 and equity prices fall by about 60% from the third quarter of 2014 through the fourth quarter of 2015. The central bank said Thursday it will release the results of stress tests, required by the Dodd-Frank Act, written in the wake of the 2008 financial crisis, on March 5. On March 11, another series of stress test results will be distributed by regulators that will let the institutions know whether the central bank has approved their capital distribution plans, which include dividends and stock buybacks. Banks are expected to privately receive a preliminary decision on whether their capital distribution plans are approved or rejected on March 5, according to people familiar with the situation. At that time, if their plans are not approved, they have one chance to revise their distribution plans downward as part of an effort to get final plans approved by the March 11 release date for the second set of tests, dubbed the Comprehensive Capital Analysis and Review, or CCAR. Most banks are expected to pass the first set of tests and any that fail will typically only be allowed at most to keep the same low level of capital distribution as they did the year before. Last year, Zions Bancorporation was the only bank that came in below the minimum financial ratios set out in the first test. For the passing banks, don't expect the first set of test results to provide any significant indication of how they will do on capital distributions because the two tests have different metrics for success. Investors should watch for whether big banks get in trouble with a qualitative component in the second round of the tests. So-called "qualitative deficiencies" are problems with internal controls or issues with projections made by internal company-run exams. Last year, Citigroup , RBS Citizens Financial and Santander Holdings USA failed on qualitative grounds. For Citigroup, that meant its total net payout in 2014 is expected to come in at a paltry 2% of earnings. Must Read: Warren Buffett's Top 10 Dividend-Paying Stocks for 2015 Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, said his firm estimates that Citigroup will still be among the most restricted of the big banks in terms of capital distributions after the results are released. KBW estimates that Citigroup will be permitted to have a total net payout of 35% over the five-quarters starting in April, but he cautions that KBW estimate represents a "meaningful" increase in distributions that could fall short of expectations. "Were cautious on Citigroup because they've had issues with CCAR in the past and there is no indication that they have improved their situation," Kleinhanzl said. Another analyst said that the Fed didn't even look at Citigroup's plan last year, adding that the central bank was concerned about qualitative control issues from 2013 that it asserted that the megabank didn't fix. Ally Financial is not expected to repurchase any shares or pay a dividend through 2016 as the company will likely use its capital for liabilities management, KBW said in a report. Other banks KBW expects to be on the low end include Bank of America , with net payout ratios of 32% of earnings, Zion at 9% of earnings and SunTrust Banks at 55%. Kleinhanzl said KBW is also cautious about its estimate for Goldman Sachs , at 80% of earnings, because it is a substantial increase for its estimate for 2014 of 48% of earnings. Last year Goldman and BofA would have failed on quantitative grounds had they not resubmitted less ambitious capital distribution plans. The banks KBW expects to return the most capital as a percentage of their earnings to investors include KeyCorp at 84%; Discover Financial Services at 88%, Fifth Third Bancorp at 81% and State Street at 93%. Last year, RBS Citizens was one of the banks to fail the test. This year, Citizens Financial Group conducted a $3.5 billion IPO in September, separating it from its U.K. parent Royal Bank of Scotland Group. One analyst covering the tests said he is optimistic about Citizens' payout ratio for the next five quarters, arguing that they have been able to address some of the issues raised in 2014 and that capital distributions are important to them. Other financial institutions conducting tests include: JPMorgan Chase , Wells Fargo , Morgan Stanley , BB&T , Bank of New York Mellon , American Express , Capital One Financial , PNC Financial Services Group , Regions Financial and U.S. Bancorp . The banks to watch most closely, though, are the institutions the Fed has tagged previously. And those names, especially Citigroup and Bank of America, are all too familiar. Must Read: Why Only Big Bankers Can Flout the Rules and Get Away With It Read more from:
Click to view a price quote on C. Click to research the Banking industry.
from Latest TSC Headlines http://ift.tt/1B6UD6V
No comments:
Post a Comment