Some of the U.S. banks will be notified about the results of the second round of stress tests conducted by the Federal Reserve, the Wall Street Journal reported.
This long expected decision is a major milestone for the banking sector, signalling that the notified banks have fully come out of the effects of the financial crisis. This paves the way for these banks to reinstate dividends and buyback shares. Due to the recession, the Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money.
Following the repayment of the bailout money, many banks started pressuring the regulators to let them restore their dividends. In January, all 19 banks which were subjected to the stress tests in 2009, had submitted their capital plans to the Fed for the second round.
These banks, including big names such as JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C) and Wells Fargo & Company (WFC), needed to show that they had adequate capital to address potential losses over the next two years under various scenarios.
And although banks such as KeyCorp (KEY) and SunTrust Banks Inc. (STI) were also subjected to the stress tests, they are unlikely to be allowed to hike their dividends as they have not repaid their bail-out money.
The Fed has reportedly restricted the banks from releasing details of how they fared in the stress tests. They can just state whether they have been allowed to hike dividends or not. Additionally, they will not be able to discuss any analysis and evaluations with the public.
Similarly, the Fed will also not disclose any findings related to a particular bank with the public. This is in sharp contrast to the full disclosures made during the first round of stress tests in 2009. On Friday, the Fed also intends to reveal its methodology used to test the banks’ balance sheets.
Once the banks receive the green signal from the Fed to boost dividend payout ratios, they will be immediately able to announce their plans. Payouts are expected to be in the range of 20-30% and banks may also announce share repurchase plans. Before the financial crisis struck, banks typically paid out in excess of 30%.
However, some banks such as BofA and Citigroup are not expected to receive the stress test results soon. These banks had earlier stated that they will raise dividends in the second half of 2011 or in 2012. Hence, they form the second batch of banks that will be notified later this year.
The Fed’s approval regarding dividend restoration will have a material bearing on the sector; effectively dividing the banking group into two groups. On the other hand, names of the banks that get the green light would hardly come as a surprise to the market. Share prices of banks that were perceived to be better capitalized, such as JPM and WFC, had stood out from the rest of the pack.
If most of the major banks pass the stress test and consequently get the permission to increase dividend, it will definitely boost investors’ confidence in the U.S. Banks.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
KEYCORP NEW (KEY): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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