Keith Horowitz and team at Citi in their recent research report titled “2014 CCAR Playbook” highlighted their expectations for this year’s results for both share repurchases and dividends.
DFAST and CCAR results in March
Taking their cue from last year’s release dates, the Citi analysts anticipate the Dodd Frank Stress Test (DFAST) results will be disclosed around March 7th, 2014. DFAST highlights projections by the Fed of the bank balance sheets / income statements under the stress scenarios.
The analysts expect the Comprehensive Capital Analysis and Review (CCAR) results would be unveiled around March 14th, 2014. The CCAR will highlight whether the Fed objects to the banks’ capital return plans.
The analysts expect 2014 capital plans to include modestly higher stock repurchase plans, while on the expected dividend increase, the Citi analysts are roughly in-line with consensus. The following table depicts the analysts’ expectations:
DFAST/CCAR stress test results won’t drive stock price
The Citi analysts note the stress tests had more information content in the past as it helped investor perception about the adequacy of capital levels. However, with capital across the U.S. banks at strong levels, the analysts believe it becomes more of a timing issue and hence should not meaningfully impact valuation.
The analysts caution that in the event of the stress results are perceived to be much tougher than prior cycles, this could have a dampening effect for the group, as it could signal that the banks will need to hold more capital.
The Citi analysts believe the ultimate capital constraint is not Basel III Tier 1 common levels, but the CCAR test. The analysts anticipate their coverage universe slightly increasing gross payout ratios to 62% from 55% last year. The following table captures the effect of CCAR on total payout ratios:
Past year’s performance won’t be repeated
The Citi analysts point out that bank stocks reacted positively to the 2013 DFAST / CCAR results, with BKX posting 3.47% increase as against S&P 500 clocking 1.25% increase. Last year between the time of DFAST and CCAR result announcements, the BKX outperformed the S&P 500 by over 220 bps, as the results were broadly viewed in a positive light.
Similarly, in 2012 too, the BKX outperformed the S&P 500 by 426 bps between March 12th and March 14th, as the banks were largely approved for their capital plans despite a more rigorous test compared to the prior year.
However, the Citi analysts don’t believe this year’s stress test results will have any meaningful impact on valuations.