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Regulators are due to vote today on whether to increase the "leverage ratio" for the eight largest U.S. banks to 5-6% of their total assets. The Basel III standard is 3%.
The move would force banks to add tens of billions of dollars in loss-absorbing capital, although many firms have already been bulking up in anticipation of the rule change.
Meanwhile, the Fed has given banks two extra years - until July 2017 - to ensure that their collateralized loan obligations (CLO) comply with the Volcker rule's restrictions on speculative investments. The extension is a reaction banks' fears that selling their CLOs would lead to substantial losses.
Add another to list of banks being downgraded in the wake of mostly conservative capital returns, and just ahead of what are expected to be sluggish Q1 earnings reports: BB&T (BBT -0.5%) is cut to Outperform from Strong Buy at Raymond James.
A few years after public and regulatory outcry forced banks to reverse course on overdraft fee hikes, lenders are lifting them again, with economic research firm Moebs Services putting the median fee at $30 in 2013, up $1 from 2012, and $4 from 2009. "Banks have a revenue gap that needs to be recouped," says Bankrate's Greg McBride.
Call it an unintended consequence of new regulation. The Fed in 2010 stopped banks from automatically charging overdraft fees on debit-card and ATM transactions, and among Dodd-Frank's rules is an amendment lowering debit-card fees charged to merchants. Overdraft fees are where the money is in checking, with KBW estimating banks generated $31.9B of overdraft revenue in 2013, well off from a peak of $37.1B in 2009.
Among those hiking: U.S. Bancorp (USB) boosted its fee to $36 from $35 last August and Boston Private Bank (BPFH -0.3%) to $30 from $25.
Banks like Wells Fargo (WFC -0.1%) and JPMorgan (JPM -0.4%) offer overdraft-protection programs where money is transferred from another account to cover the shortfall. The fee at Wells is $12.50 for each day it's used; Chase charges $10.
Count Credit Suisse's Moshe Orenbuch as surprised about the Fed's denial of Citigroup's (C -0.5%) capital return plan. Maybe Citi is just too tough for regulators to get their arms around as it is the most complicated of all the bank holding companies.
Included in the Credit Suisse report is this handy chart of dividends, buybacks, and payout ratios for all of the CCAR banks for 2013 and 2014. Things are loosening up - the median payout ratio (includes dividends and buybacks) this year of 71% compares to 59% in 2013. The dividend payout ratio rises to 26% from 23%.
It helps to be smaller - among the TBTFs, Citi's payout ratio is just 8%, BofA (BAC) 37%, JPMorgan (JPM) 56%, Morgan Stanley (MS) 41%. Wells Fargo is above the median though, being allowed a payout of 79%.
The regionals (KRE), trust banks, and credit card companies - for the most part - were all allowed payout ratios above the median.
The strongest capital returns vs. CS's expectations are those for BNY Mellon (BK), Capital One (COF), KeyCorp (KEY), Huntington Bancshares (HBAN), PNC Financial, and Wells Fargo.
It's a slow grind for bank capital returns (at least those subject to the CCAR), notes Goldman' Richard Ramsden, with payout ratios boosted just four percentage points to 62% this year. There are clear winners, he says: The credit card companies led by AXP and COF and the trust banks led by BK. Regional banks (KRE) boosted returns but generally fell short of expectations (with HBAN and PNC being the exceptions). Worst-performing were the TBTFs, though JPM and WFC were positives.
"CCAR highlighted the challenges large-caps have in returning excess capital," he says, with Citigroup's (C) failure a reminder the process is unpredictable. With all that excess capital remaining on the balance sheet, Ciit's 2015 goal of a 10% ROTCE appears unlikely to be met.
For Bank of America (BAC), it's resubmission - a better outcome than outright failure - reminds that even well-capitalized banks are "bound by stressed capital and could have trouble returning outsized capital."
Both Bernstein and KBW remove Outperform ratings on Citigroup (C) the morning after its capital return plan was rejected by the Fed for "qualitative" reasons. One wonders whether this disappointment wasn't already priced in as Citi has underperformed this year, and for some time been the only one of the major banks trading below book value. Shares are off 5% in premarket action.
Overall, the bank capital returns announced yesterday are below expectations, says Compass Point's Kevin Barker, but Huntington Bancshares (HBAN) - which boosted the dividend 20% and announced a buyback for about 3% of the float - was better than hoped.
Much of the financial sector is lit up bright green, continuing to outperform following yesterday's suggestion by the FOMC and Janet Yellen that rate hikes could come sooner than expected. XLF +1.1%, KBE +1.6%, KRE +1.6%.
At new 52-week or even multi-year highs are JPMorgan (JPM +2.3%), Wells Fargo (WFC +1.7%), Morgan Stanley (MS +1.4%), and Bank of America (BAC +1.6%).
Regional lenders: U.S. Bancorp (USB +1%), Huntington (HBAN +1.5%), PNC (PNC +1.3%), BB&T (BBT +1.5%), Fifth Third (FITB +1.8%), First Niagara (FNFG +2.1%).
Leading among the life insurers are Lincoln National (LNC +1.9%), Protective Life (PL +1.6%), Manulife (MFC +1.2%), and Sun Life (SLF +1.1%).
The First Trust RBA Quality Income ETF (QINC) and RBA American Industrial Renaissance ETF (AIRR) will track their respective Richard Bernstein Advisors indexes; QINC will focus on total return through global firms with strong dividends and capital appreciation potential, while AIRR will invest in both small and mid-cap domestic firms in the industrial and community banking sectors.
The Global X Guru Small Cap Index ETF (GURX) and Guru International Index ETF (GURI) are hoping to capitalize on the success of GURU by offering exposure to small-cap and international (respectively) stocks that large hedge fund managers hold.
Buying the rumor? On a flattish day for the major averages, the Too Big To Fail banks are ignoring a continued slowdown in markets revenue this quarter, and instead partying ahead of what may be the imminent release of the Fed's stress test results (perhaps Friday). About one week later will be CCAR results at which the Fed gives the thumbs up or thumbs down on the banks' capital return plans.
Word is the tests are tougher this year, but bank capital levels are also improved.
Leading today is Bank of America (BAC +3%) - now within about one percent of a 4-year high. Others: Morgan Stanley (MS +2.8%), Goldman Sachs (GS +1.8%), Ciitgroup (C +1%), JPMorgan (JPM +1.5%), and Wells Fargo (WFC +0.6%).
Also subject to the stress tests are a number of regional lenders, not to mention credit card players - they're mixed in today's action.
With bank capital levels really no longer in question, don't expect any big pops in the banks surrounding the stress tests and CCAR results, says Citi in its "2014 CCAR Playbook." If anything - given that the stress tests are supposedly tougher this year - the risk to banks could be on the downside.
The team expects the stress test results - which looks at bank balance sheets under different scenarios - sometime around March 7 and the CCAR results - on which the Fed approves/disapproves capital return plans - about a week later.
Look for modestly higher average gross payout ratios of 62% vs. 55% last year. Individual banks: BAC 11% dividend (payout ratio) + 32% buyback for 43%; BBT 33% dividend +19% buyback; FITB 32% dividend + 37% buyback; JPM 27% dividend + 18% buyback; WFC 28% dividend + 43% buyback; GS 14% dividend + 78% buyback for an industry-leading payout ratio of 91%; MTB 34% dividend + 0% buyback; MS 17% dividend + 36% buyback; PNC 31% dividend + 49% buyback; USB 30% dividend +46% buyback.
Expecting dividends to grow 49% on average for the banks subject to the Fed's stress tests (about the same as last year), Markit, says Citigroup (C) and Bank of America (BAC) will lead the way with 400% boosts. "They are the last of the major banks paying minimal dividends ... change is overdue."
While 400% is a big number, Citi and BofA will continue to lag their peers in terms of yield (400% growth on a penny just leads to a nickel).
Also expected to have a significant pop is Morgan Stanley (MS) - a doubling of the payout to $0.10 per share and a 1.4% yield. Others in the top 5 in increases are Zions Bancorp (ZION) with a 75% boost to $0.07 and Regions Financial (RF) up 67% to $0.05.
The others: KEY +27%, HBAN +20%, BK +20%, STI +20%, COF +17%, DFS +15%, AXP +13%, STT +12%, JPM +11%, CMA +11%, PNC +9%, USB +9%, GS +9%, FITB +8%, WFC +7%, NTRS +6%, and no soup for BBT and MTB where the dividends are expected to be flat at $0.23 and $0.70 per share, respectively.
As for ETFs, the dividend jumps are expected to have the biggest impact on the XLF which would see a 25% increase in payout: The ETF has 81 companies, but the top 5 holdings - BofA, Wells, JPM, Citi, USB - make up 41% of assets. In contrast, just two CCAR banks make up the top five holdings of the KBE and it should see a more muted increase of just 18%.
Wells Fargo (WFC) has lowered the minimum FICO score for borrowers applying for FHA loans to 600 from 640, and JPMorgan (JPM +0.1%) plans to lower LTV standards for both jumbos and conforming mortgages, reports TheStreet.
The moves come as the MBA predicts 1-4 family mortgage originations will fall to $1.16T this year from $1.755T in 2013. An early estimate from Inside Mortgage Finance pegs MBS issuance by the GSEs in January of just $67.8B, off 10% since December and the lowest amount since January 2009.
"The wall has begun to come down," writes FBR's Paul Miller of the Wells Fargo news. Miller has been calling for easier standards to combat slowing activity, and if Wells is now approving FHA product to riskier borrowers, other large originators are likely to follow suit. In this case, his own estimate of $1.3T in mortgage originations this year could prove conservative, and bank earnings surprises going forward might be on the upside.
“It is now obvious to us that the continuing objective of the Obama administration and the U.S. Attorney General is to punish banks and finance," writes Daivd Kotok's Cumberland Advisors, explaining a decision to underweight the banks.
The firm previously had been overweight the regionals via the KRE and just two weeks added exposure to the larger lenders through the KBWB, but has quickly decided to reverse that move. "We were wrong" in thinking the "persecution" of the banks was near over, says Cumberland.
"The investment strategy we pursued for our clients in this case was not to confront the U.S. Attorney General with an overweight position in a sector that he views as adversarial.”
Federal regulators have decided to ease the Volcker Rule and will allow smaller banks to hold certain CDOs of trust-preferred securities (TRuPS) that they may otherwise have had to sell.
The move comes after the American Bankers Association threatened to sue over the provision, which the industry group said would have forced 275 small banks to take a $600M hit to capital.
The change would apply to any bank that invested in TRuPS-backed CDOs that were issued by banks with under $15B in assets. There are also time conditions attached.
At least three lenders - Zions Bancorp (ZION) being the most prominent - had said prior to the latest ruling that they would have to write down or divest the CDOs immediately at a substantial loss. Zions has assets of $55B.
Despite constant concerns about banks that are "too big too fail," the amount of assets that the U.S.'s five largest lenders control has grown to 44.2% of the total in the sector from 43.5% in 2012, a report from provider SNL Financial shows.
In 2007, the figure was 38.4% and in 1990 it was just 9.67%.
The banking operations of JPMorgan (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and U.S. Bancorp (USB) held $6.46T in assets as of Q3 2013.
The easing of regulation, which gained momentum in the 1990s, encouraged consolidation in the sector, as did the government pushing stronger banks to buy those that were about to collapse - or did collapse - because of the financial crisis in 2008.