Shareholders could benefit from big dividend increases at Wells Fargo & Co.
(WFC) and other lenders if the Federal Reserve approves the banks' plans under
its latest stress test, industry experts say.
The Fed is set to release the results of its Comprehensive Capital Analysis and Review -- a rigorous evaluation of banks' capital levels and ability to weather a severe economic downturn -- for 19 large U.S. bank holding companies this week. Analysts expect a number of firms to earn the Fed's approval to increase stock buybacks and dividend payments this year, a move some say could help restore investors' confidence in the financial sector.
"Although this year's stress test assumptions are significantly more onerous than prior years, we believe most of the companies will pass the test," analysts from Keefe, Bruyette & Woods said in a research note Monday.
San Francisco-based Wells Fargo, which bought Charlotte's Wachovia in 2008, is expected to fare better than many of its peers, given its relative health through the recession. Robert W. Baird & Co. analyst David George predicts the bank will nearly double its annual dividend to 95 cents per share, giving it the third-highest payout among big banks.
Analysts surveyed by Bloomberg News recently forecast the bank will boost its dividend to 75 cents per share from 48 cents. Overall, 13 of the 19 largest U.S. lenders might say they will pay out nearly $3.8 billion in extra dividends this year and buy $5.5 billion of additional shares, 30 percent more than they spent last year, Bloomberg reported.
Big banks submitted data to regulators in January for this year's stress tests. The Fed is using that information to determine whether lenders can maintain a sufficient level of capital under dire economic circumstances, including a 13 percent unemployment rate, 50 percent stock market decline and 21 percent slide in housing prices, the regulator said in a news release Monday.
It's still unclear what exactly the results will reveal. The Wall Street Journal reported last week that banks were clashing with regulators over how much information would be disclosed in the stress tests results, with one lobbying group owned by units of major banks telling the Fed that releasing too many details might have "negative consequences" for lenders.
Still, many analysts expect the banks to meet the Fed's approval. After slashing dividends in the wake of the financial crisis, U.S. lenders have been building their capital and boosting profits. Fed data show Tier 1 common capital levels at the 19 bank holding companies have climbed to nearly $760 billion in the fourth quarter of 2011 from $420 billion in the first quarter of 2009, and ratios of high-quality capital to risk-weighted assets at those companies are improving.
Not every firm will boost dividends once the stress test results are released, though. Charlotte-based Bank of America Corp. (BAC), which continues to struggle with mortgage-related troubles stemming from its 2008 acquisition of Countrywide Financial Corp., did not ask to raise its 4-cent annual dividend or buy back shares.
The Fed denied its request for a dividend increase last year. A bank spokesman on Monday said he could not comment on this year's stress test until the results become public.
During an investor conference last week, Bank of America chief executive Brian Moynihan said he was encouraged by the bank's efforts to strengthen capital and improve its balance sheet.
"We owe the shareholders a return one way or another way," he said. "We're trying to get there as fast as we can."
Some analysts say other firms might also take a conservative approach in requesting dividend increases.
"Given the uncertainty in Europe and potential spillover to U.S. markets, we believe one of the Fed's goals is to limit capital leaving the banking system," KBW analysts said Monday, calling the Fed's stress test this year "fairly draconian."
They still predict attractive dividend yields, though, forecasting Wells Fargo will increase its annual payout to 72 cents per share, for instance.
A Wells spokesman declined to comment Monday about what the bank has requested or what it expects to hear from the Fed. But bank officials -- who boosted the bank's dividend to 48 cents from 20 cents last year -- have said in recent months they hope to return more capital to shareholders.
Chief financial officer Tim Sloan touted the bank's record 2011 performance during a recent investor conference, saying the numbers reflect the benefits of Wells Fargo's business model.
"We increased our capital levels while providing shareholders with a higher return on investment by raising our dividend and repurchasing 86 million shares of common stocks -- at a profit, I might add," he said.
Bank stocks have rallied so far this year. This week's stress test results could either curb that momentum or push financials higher, analysts say. For Bank of America, for instance, better than expected results from big-bank peers might drive its stock lower, while an unexpected dividend hike could move shares higher, KBW analysts said.
Nancy Bush, a contributing editor at SNL Financial, said she doesn't expect surprises from the Fed this week. But she worries the results could spook investors, depending on how much information they reveal about big banks' condition.
"It's a process that is really fraught with danger, because how do you not set off another stampede out of the bank stocks?" she said.
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