Positive results from the Fed’s stress test have allowed three major banks to increase their dividends and share buybacks dramatically, up 220%, 50%, and 33% respectively! These big increases bode well for the total return potential of these three banks. Our recommendation, buy shares now.
The last week has produced news at the opposite extremes for British banks compared to their U.S. based counterparts. For the UK banks, the Brexit vote to leave the European Union turned their fortunes from positive to negative. Just a few days later, the U.S. Federal Reserve issued a report that allows some of the major U.S. banks to significantly increase their dividend payments.
The vote by the citizens of the United Kingdom to leave the European Union may end up having the greatest negative effect on the major British banks. With Britain as a member of the EU, London had become the primary banking center for all of Europe. Now, with the requirement to renegotiate the financial ties between the UK and EU, the British banks could lose a lot of clout and profitability. A prime example is Barclays PLC (ADR) (NYSE: BCS), which has a share price that is now 30% below the closing value on June 23 before the vote results were known. In general, European and U.S. stocks have recovered most of the declines driven by the shock of the vote to leave the EU. The stock values of the London banks have not participated in the recovery. It may be years before the actual effect of the vote on the banks is truly known.
On the U.S. side of the Atlantic, the Federal Reserve over the last week released the results of its annual stress tests of big U.S. banks. The tests are a review of the capital plans submitted by the individual banks. The Fed is looking to see if the banks can weather a significant economic recession. The ability to pass the test depends on if a bank has sufficient core capital.
If the bank passes the stress test, the Fed tells them how much excess capital it currently has, and that excess can be used for other purposes such as paying dividends or buying back shares. In its report, the Federal Reserve cleared 31 of 33 large banks to use excess capital reserves to boost returns to investors.
