Over the next three years, the banking industry is poised to return nearly all of its excess capital and close to 100% of non-retained earnings annually to shareholders, believes RBC Capital Markets.

Gerard Cassidy and the team at RBC Capital Markets, however point out that such return of excess capital would be tempered by regulatory considerations such as CCAR and SLR.

Earlier, Bernstein in its report pointed out that Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) should have the greatest amount of excess capital as a percentage of market caps over the next couple of years.

Excess capital, earnings to enhance dividends, buybacks

The RBC analysts point out that based on their analysis of 15 of the largest U.S. commercial banks, they anticipate that, on average, in the next three years excess capital and earnings could be used to steadily increase dividends and buybacks approximately 19% of a bank’s market capitalization.

In the following table, the analysts ranked 15 of the top 20 banks based on their capacity to use excess capital and estimated earnings to fund the repurchase shares over the next three years. The table ranks companies in descending order based on their aggregate potential share repurchases over the next three years as a percentage of the current market capitalization:

Share buyback capacity

Methodology used for computing excess capital

RBC analysts have computed the amount of excess capital available for dividends and share repurchases by considering the top 20 banks who provided 3Q13 estimates of their Basel III Tier 1 Common Capital Ratios (CCR). For computing the excess capital, the analysts have assumed global systemically important financial institutions run 100 basis points over their mandate to maintain Basel III Tier 1 CCR.

By using 3Q13 reported results and based on the analysts’ prescribed minimum Basel III Tier I CCR, the analysts have arrived at the following table to depict the excess (or shortfall) of capital for each bank:

Computation of excess capital buyback

Wells Fargo tops the list

As can be seen on the above table, Wells Fargo & Co (NYSE:WFC) tops the table with $7,006 million of excess capital.

As highlighted in the following table, Wells Fargo shows aggregate potential buyback of $41,961 million, translating into buybacks / market cap ratio of a healthy 18.1%.

WFC Repurchase capacity buyback

Bank of America Corp (NYSE:BAC) follows next with $5,837 million of excess capital. The following table highlights the fact that Bank of America has an aggregate potential buyback of $25,157 million, with a repurchase/market cap ratio standing at 15%.

Bank of America repurchase capacity buyback

Citigroup Inc (NYSE:C) occupies the third slot with $5,820 million of excess capital. As can be deduced from the following table, Citigroup has an aggregate potential buyback of $29,247 million, translating into repurchase/market cap ratio of 19%.

Citigroup repurchase capacity buyback

Despite having a shortfall in capital to the extent of $18,768 million, JPMorgan Chase & Co. (NYSE:JPM) has a potential buyback of $15,981 million, with a repurchase/market cap ratio standing at 8%.

JP Morgan repurchase capacity buyback

Gerard Cassidy and the team at RBC Capital Markets believe the banking industry will be permitted by regulators to return greater amount of capital over the next three years as it demonstrates improved profitability and stronger capital levels. Hence the analysts believe investors should anticipate growing dividends and larger stocks repurchase over the next three years.