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David Paul Morris/Bloomberg
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Bank investors this week found reason to rejoice.
On Thursday, the Federal Reserve announced that all 23 banks subjected to this year’s stress test passed easily. This was widely anticipated good news, and the KBW Bank index rose 6.9% this week, its best run since early February. The index has risen by 30% this year.
What comes next, however, should be even better news: the banks are now free from the Fed’s pandemic restrictions on returning capital to shareholders. For example, Barclays analysts expect the 20 banks in their coverage universe to return as much as $200 billion to shareholders over the next four quarters, double what they paid last year, giving investors plenty of reason to stick with the industry.
Put another way, the total payout yield for bank stocks is expected to be about 8.5%, says Barclays Jason Goldberg, 2.6% attributed to dividends, the rest to buybacks.
Announcements will begin after the Monday market closes. In previous years, banks published their plans moments after the Fed announced the results of the stress test. This year, however, the central bank asked the banks to delay for a few days to better assess their results.
What’s clear is that some of these numbers are big, particularly in stock buybacks. Keefe Bruyette & Woods say the 14 banks it covers should see gross payouts of dividends and buybacks of more than 100% of revenue this year.
bank of Americaso
(ticker: BAC) payout is linked to 115% and
JPMorgan Chase
(JPM) at 106%.
Wells Fargo
(WFC), which has weathered the pandemic and been held back by the Fed for its fake account scandal, could reach 145%.
The generosity doesn’t just come from the big banks.
Capital One Financial
(COF) stood out to analysts for the largest drop in the stress capital buffer, or SCB, the amount of excess capital banks are required to maintain based on their risk profile. Capital One’s SCB fell to 2.5% from 5.6%, according to estimates from KBW’s Michael Brown, who sees the bank paying dividends of $690 million, up from $463 million in 2020. Capital One is also expected to announce a total of $7.95 billion in repurchases.
Then there is
Regions Financial
(RF), which was not required to participate in this year’s test, but chose to do so along with three other smaller banks. That decision paid off, as it was able to demonstrate that it could work effectively with a lower SCB. Regions SCB fell by half a percentage point to 2.5%.
analysts at
UBS Effects
expects Regions to return $2.4 billion to shareholders, with $1.8 billion coming from buybacks, an amount that could have been higher had the bank not said it would delay buybacks until the acquisition of EnerBank USA is completed .
Capitol One and Regions were both up 6.6% for the week.
Write to Carleton English at [email protected]
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