Wall Street anticipates bank stocks to rise now that the Federal Reserve has permitted their plans to make a significant increase in payouts to shareholders.
“Investors should benefit from meaningful capital returns over the next four quarters, while the regulatory backdrop continues to improve,” Barclays managing director and senior equity analyst Jason Goldberg said in a Thursday report.
The 22 banks Barclays covers have promised to return $130 billion of capital to shareholders in dividends and share repurchases, he stated in the letter.
He anticipates the median payout ratio of banks to hit 97% of profit over the next 12 months, which would be the second-highest level in at least 20 years. The last time the payout ratio was higher was in 2007 when bank earnings fell in the second part of the year as the financial disaster began to unfurl.
Barclays expects Regions Financial Citigroup, Fifth Third Bancorp, Bank of New York Mellon, Goldman Sachs and JPMorgan Chase to have the largest gross share repurchase payout ratios at more than 75% each.
Financial stocks have grappled so far this year amid delays in passing a new law that would reduce tax rates and relax regulation on the industry. Thursday’s rise pushed the sector to only the fourth worst in the S&P 500 this year, while technology stocks continued the best performer for 2017.
The Fed on Wednesday did not oppose to the capital return plans of the 34 banks it examined in the second of an annual two-part test to see if they have enough capital to withstand a sharp economic downturn. After it had given the go-ahead, many major banks declared significant gains to dividends and share repurchases.
“Right now, things are pretty good in lending” for the banks, said Kenneth Leon, research director, industry and equities, at CFRA Research. “That all bubbles up to having excess capital that can be a return of capital.”
Citigroup doubled its dividend. JPMorgan Chase stated it approved share buybacks of up to $19.4 billion in the 12 months starting July 1, its biggest repurchase program since the financial disaster. New regulations in the aftermath of the crisis made big banks like JPMorgan seek proper approval from the Fed to purchase back shares and raise dividends.
JPMorgan’s buyback plans surpassed Credit Suisse research analyst Susan Roth Katzke’s prospect. In a Wednesday release, Katzke raised the price target on JPMorgan Chase to $102 from $99 a share.
The stock closed up 1.48%, to $91.15 on Thursday. The Financial Select Sector SPDR ETF (XLF) closed 0.65% higher, a fourth-straight day of gains as one of two advancing areas in the S&P 500.
Though they have failed this year, financial stocks are the best performers in the S&P 500 since the November election as investors bet the industry would benefit the most from the Trump government’s plans for tax reform and deregulation. Analysts also anticipate the Fed’s plans to raise interest rates to be a boost to the banks’ lending business.
Still, the financials ETF remains about 20% below the all-time highs hit a decade ago, just before the financial crunch reached its worst days in 2008.
“Our thesis is not as driven around ‘interest rates going higher’ as many economic bulls, but rather the very clean deregulatory environment we are in and entering,” David Bahnsen, chief investment officer of The Bahnsen Group, said in an email. “We think as a sector there is certainly 15-25% more upside if all the stars align correctly, and for many that will mean pre-crisis highs, and for many it won’t.”
Even Capital One Financial, which earned approval on condition that it submits an updated plan by Dec. 28, saw a 15.7% decrease in the likelihood of default, the model showed. JPMorgan Chase’s likelihood of default fell 24.2%.