The Federal Reserve released the result of its annual stress test last week. All passed with the exception of Ally Financial, where Ally's capital ratio sank to 1.52% in the stressed scenario with the resubmitted result, where 5% is the Fed's minimum. Further, the Fed placed conditions on the capital distribution plans of Goldman Sachs (GS) and JPMorgan Chase (JPM) and rejected BB&T's (BBT) capital raising plans. In this article, the top three mega banks, which passed the Fed's stress test without conditions, will be presented with their new buyback plans and dividend policy, including Wells Fargo & Company (WFC), Citigroup, Inc. (C), and Bank of America Corporation (BAC).
Wells Fargo & Company
WFC was up 3.33% and closed at $38.20 on March 18, 2013. WFC has the largest cap of $201.35B among all U.S. banks. WFC is making a new 52-week high at $38.20, which is still below analysts' target price of $39.51.
On March 14, 2013, Wells Fargo confirmed that its 2013 capital plan includes a proposed dividend rate of $0.30 per share for the second quarter of 2013, subject to consideration and approval by its Board of Directors at its regularly scheduled meeting in April. The plan also includes a proposed increase in common stock repurchase activity for 2013 compared with 2012. WFC's Chairman and CEO John Stumpf stated:
We are extremely pleased to be able to reward our shareholders with increased distributions for 2013. Today's decision by the Federal Reserve Board not to object to our 2013 Capital Plan allows us to further increase our common stock dividend in 2013 and to undertake repurchase activity to return more capital to our shareholders. Our ability to do this is a testament to our diversified business model, which has allowed us to serve more customers and continue to grow capital while at the same time generating record earnings and providing our shareholders with more return on their investment.
Fundamentally, there are a few positive factors for WFC:
- Higher net margin of 20.1% (vs. the industry average of 11.4%)
- Stronger ROE of 13.2 (vs. the industry average of 5.7)
- Lower debt/equity of 0.9 (vs. the average of 1.2)
- Lower P/E of 11.4 (vs. the industry average of 14.5)
- Lower Forward P/E of 9.7 (vs. the S&P 500's average of 13.9)
- WFC has a 5-year average dividend yield of 2.10% and currently offers a forward annual dividend yield of 2.60%
Citigroup was down 0.42% and closed at $47.26 on March 15, 2013. Citigroup has a market cap of $143.61B with a high beta of 2.61. The stock had been trading in the range of $24.61-$47.92 in the past 52 weeks.
On March 14, 2013, Citigroup announced that the Fed has approved the planned capital actions requested by Citigroup as part of the 2013 Comprehensive Capital Analysis and Review. The planned capital actions include a $1.2 billion common stock buyback program through the first quarter of 2014 and the maintenance of current common stock dividends ($0.01 per share per quarter), subject to approval by Citigroup's Board of Directors. Citigroup's CEO Michael Corbat said,
We are pleased that Citi will be able to return additional capital to shareholders. Over the past several years, we have rebuilt Citi's capital base and strengthened our balance sheet as well as shed assets and businesses not core to our strategy. We remain focused on our clients and allocating our resources to where they can provide the best returns and generate consistent, high-quality earnings.
Fundamentally, there are a few positive factors for Citigroup:
- Lower P/B of 0.8 (vs. the industry average of 0.9)
- Lower debt/equity ratio of 1.3 (vs. the average of 2.1)
- Lower Forward P/E of 8.8 (vs. the S&P 500's average of 13.9)
- Citigroup is currently trading below its book value of $61.57
- Citigroup currently offers a forward annual dividend yield of 0.10%
Bank of America Corporation
BAC was up 3.80% and closed at $12.57 on March 15, 2013. BAC made a new 52-week high of $12.66 on the last trading day. BAC has a market cap of $135.48B with a high beta of 2.38.
On March 14, 2013, BAC authorized the repurchase of up to $5.0 billion of common stock and the redemption of approximately $5.5 billion in preferred stock, which was approved by the Fed. The company's 2013 capital plan did not include a request to increase the quarterly common stock dividend rate of $0.01 per share. CEO Brian Moynihan stated:
We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders. We believe buying back common shares is the best way to continue to drive value for our shareholders.
The company's Board of Directors also approved the redemption of all the outstanding shares of two series of the company's preferred stock. The 8.20% Non-Cumulative Preferred Stock, Series H, will be redeemed on May 1, 2013, and the 8.625% Non-Cumulative Preferred Stock, Series 8, will be redeemed on May 28, 2013. The redemption price for each of these preferred stock series will be 100 percent of the liquidation preference per share, as specified in the company's certificate of incorporation. Mr. Warren Buffett was not affected by this redemption plan as he owns the Series T, which has no maturity date and ranks senior to the outstanding common stock with respect to the payment of dividends and distributions in liquidation.
Fundamentally, there are a few positive factors for BAC:
- Lower P/B of 0.6 and P/S of 1.6 (vs. the industry averages of 1.0 and 2.3)
- Lower Forward P/E of 9.8 (vs. the S&P 500's average of 13.9)
- BAC is currently trading below its book value of $20.24
- BAC currently offers a forward annual dividend yield of 0.30%
In short, Citigroup and Bank of America remain a buy with improving fundamentals, while both are still trading below their book values. Citigroup's valuation is supported with its strong cash generation ability. With BAC's huge deposit and collection of businesses, BAC enjoys a narrow economic moat. BAC still has a lot of upside potential as its profitability improves. Lastly, WFC remains one of the most solid mega banks in the United States with its superb management and relatively simple business model. WFC's quality is backed up by Warren Buffett's continuous, strong buying in 2012.
Note: All prices are quoted from the closing of March 15, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.