The Fed Won't Embarrass Big Banks Again

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Last year the Fed publicly embarrassed Citigroup (NYSE: C). During the Stress Tests in 2012, Citigroup applied to repurchase $8 billion of its own shares over two years.  But the Fed said no.

This year is a different story.  Citigroup kept its requests far more modest, as CEO Michael Corbat and Chairman Michael O’Neill “told executives that under no circumstances will Citigroup fail to win approval this time around,” reported The Wall Street Journal.

Further, Citigroup kept its quarterly dividend unchanged at $.01 per common share, while declaring dividends on preferred shares. 

According to The Wall Street Journal, financial dividend yields have plummeted.  Through the first nine months of 2012, yields sat at just 1.71%, versus 3.86% in 2007 and 4.88% in 2008.  (Note that 2008 results are slightly skewed, because stock prices fell and pushed yields higher.) 

But nonetheless, major banks are ready to start returning capital to shareholders.  And Citigroup isn’t the only Wall Street firm trying to carefully navigate this year’s stress tests.  Here is a breakdown of how other major banks stand.

Bank of America

Bank of America (NYSE: BAC) saw hard times, trading near $5 at the end of 2011.  In 2012, however, Bank of America jumped 109%.  The company’s price popped because the bank is expected to begin repurchasing outstanding shares, meaning that shareholders who do not sell will find themselves with increased earnings per share and dividends per share.

The downside for Bank of America is its low profitability.  The bank posted a measly 2.9% return on tangible shareholder equity through the first nine months of 2012, and the bank eked out a small $340 million profit in Q3, compared to $6.23 billion in 2011.  The major cost prohibiting earnings growth was $1.6 billion in legal expenses.

Recently Bank of America reported Q4 earnings of $700 million, a $.01 quarterly dividend, and dividends on preferred stock.  Be on the lookout for any share repurchases, which could be a continued boon for the stock if the markets stay positive.

J.P. Morgan

JPMorgan (NYSE: JPM) suffered a massive $6 billion trading loss that halted its share repurchases.  However, CEO Jamie Dimon reassured investors with his own share purchases in 2012. 

Overall, JPMorgan’s capital position is among the strongest of any bank.  The firm’s Chase unit provides incredible stability and strength, while the investment banking unit provides an engine for continued profits in positive economic times.  Look for JPMorgan to continue share repurchases and bolster dividends.

Morgan Stanley

Once a trading tycoon, Morgan Stanley (NYSE: MS) struggled to find new profits in the slow economic environment.  Morgan Stanley is not expected to increase its dividend past $.20 per share or to conduct share buybacks.

Instead, Morgan Stanley hopes to grow by repurchasing the remaining 35% of its Morgan Stanley Wealth Management (previously Morgan Stanley Smith Barney) joint venture with Citigroup. With the Fed’s approval, Morgan Stanley plans to spend $4.7 billion, which would drain $400 million of its capital, to fully acquire the financial advisory business. 

The move would be a good one.  Increasing its base of wealthy clients would provide Morgan Stanley with advisory fees at little to no increased risk.  But more importantly it would also introduce a stable crop of prime borrowers, which would permit Morgan Stanley to underwrite large, high-quality loans.  In addition, broker deposits add liquidity to Morgan Stanley.

Fifth Third Bank

Smaller player Fifth Third Bancorp (NASDAQ: FITB) pays out a $.40 per share in dividends, an approximate 2.4% yield.  Last year the Fed originally rejected Fifth Third’s plan to return capital to shareholders, although the Fed eventually did accept a revised dividend and share repurchase plan.

This year Fifth Third CEO Kevin Kabat hopes to increase dividends and to payout roughly 30% of earnings.  This means that if the bank can bolster its profits, then increased dividends are likely to follow.  In addition, additional share repurchases would allocate more earnings payout to fewer shareholders.


For the nation’s largest banks, navigating the Fed’s stress tests is becoming a game that no bank wants to lose.  The Fed rejected numerous capital distribution plans in 2012; however, the economic climate in 2013 looks far better.

Buying now, after the financial sector has led the market’s rise, is a gamble.  While the financial sector often leads the markets up, it is also inclined to lead the broad markets down.

However, at a lower entry price the financial sector appears enticing.  With increased profits, share buybacks, and enticing dividends, banks might again become great long-term investments.


ChrisMarasco has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America, Citigroup Inc , Fifth Third Bancorp, and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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