On March 7th, the Federal Reserve will release the results of the stress tests performed on the large U.S. banks. More importantly, on March 14th, the Fed will announce its decision with regard to the Banks' proposed capital management plans through their "Comprehensive Capital Analysis and Review (CCAR)." Capital management is today's in-vogue term that describes how much money these banks will be allowed to spend on dividends and buybacks. This year, the process will be modified, as banks will be able to resubmit a revised capital management plans in the event theirs is rejected.
2012 CCAR Plans
Last year the CCAR process provided a few surprises. Of the big 7 banks, JPMorgan (JPM), Goldman Sachs (GS), Wells Fargo (WFC), and U.S. Bancorp (USB) were allowed to have dividend increases and significant buyback programs. There were no dividend increases or buybacks for Morgan Stanley (MS), Bank of America (BAC), and Citigroup (C). MS was given clearance to purchase an additional 14 percent in its brokerage joint venture with Smith Barney. BAC did not ask for any return of capital, as they were gun shy from the previous year when its request to increase capital return to shareholders was rejected by the Fed. Citigroup made the biggest headlines, as its request for a US$8 billion dollar buyback program was rejected. This humiliation was among the major reasons Vikram Pandit (Citigroup CEO) was eventually fired.
Expectations for 2013 CCAR Plans
Expectations are for all the top 7 banks to pass the stress tests, and for all the capital management plans to be approved. If for some reason any Bank's plan is rejected, we can expect a significant downturn in the institution's share price. Below are our expectations for the 7 largest banks with regard to return of capital.
JPMorgan - US$22bn - CEO Jamie Dimon has made it clear on many occasions that he intends to return a significant amount of capital to shareholders in the form of dividends and buybacks. Given J. P. Morgan's success in the 2012 CCAR process, we feel that return of capital will be in excess of what was approved for 2012 before the London whale debacle, amounting to US$20bn (75% through buyback approval and 25% through dividends). This US$20bn figure is equivalent all earnings for 2012 indicating a willingness to return all profits to shareholders.
Wells Fargo - US$11bn - It should be business as usual for Wells Fargo, with an increase from the 2012 figure of US$10bn (70% buyback approval).
Goldman Sachs - US$7bn - Results for last quarter were fantastic, and capital market activity is picking up, so we can expect an increase from 2012's US$5.6bn (actual 2012 return of capital).
U.S. Bancorp - US$5bn - We project business as usual for U.S. Bancorp, with a moderate increase over last year's US$4.5bn (80% through buyback approval).
Bank of America - US$5bn - Last year its asked for nothing, so this year we think it will be conservative and ask for about ½ of what they would under more normal conditions.
Citigroup - US$4bn - After 2012's humiliation, we can expect a much more modest request from 2012's US$8bn.
Morgan Stanley - CEO James Gorman has declared that he will only request for the accelerated closing of the purchase of the remaining 35% interest that it does not already own in the Smith Barney joint venture. As closing the MSSB deal is viewed of as the highest priority, we agree that it is prudent for the firm not to allow even a small risk of rejection of their CCAR plan by adding a request for a dividend hike and/or buyback. Later in the year they should be prepared to make a special request for a dividend hike and/or buyback. This is due to the fact that from a Basel III perspective, MS is further ahead than any of the other large banks. With a Basel III tier one ratio of 9.5% (requirement of only 8.5%). MS is flush with excess capital.
2013 Bank Stock Supply Contraction
If the above estimates are accurate, you are looking at the banks distributing over US$54 billion through dividends and approval for buyback programs. We estimate that approximately US$40 billion will be the total approved buybacks for the next 12 months. This should put a strong floor under U.S. bank stocks as there will be US$40bn of stock supply reduced. This supply contraction is significant, and coupled with an improving housing market should provide a strong tailwind for the above-mentioned stocks.