Analysts Seek To Divine Which Banks Will Be Unchained By Fed

For the 19 largest U.S. banks, formal notification Friday of stress test results will mean some--not all--will be unchained from restrictions on dividends or repaying bailout funds.

Banks can't--and the Fed won't--disclose the results of the stress tests. But some boards will finally be free of restraints if they are judged to have sufficient capital; some may announce plans Friday or Monday.

Wall Street has been working overtime to figure out which banks will take what actions.

Analysts broadly agree that J.P. Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), and US Bancorp (USB) will be among the first of 19 to announce modest dividend increases after receiving results of capital plans they submitted to the Fed in early January.

Citigroup Inc. (C), on the other hand, has already said it won't reinstall its dividend until next year.

This is the second round of special stress tests by the Fed applying to those banks, which have been deemed systemically important. The first round, in spring 2009, acted as a public confidence-boosting exercise and the beginning point at which banks could repay money they received from the Treasury Department's Troubled Asset Relief Program.

Three big regional banks, KeyCorp (KEY), SunTrust Banks Inc. (STI), Regions Financial Inc. (RF), still haven't repaid their TARP funds, which they likely must do before boosting dividends. The test is also expected to reveal how much capital they have to raise to be allowed to repay the funds.

KeyCorp, considered by some analysts to have a good chance of paying back its bailout funds, has said its capital plan submitted to the Fed in accordance with the stress test included a proposal to pay back its $2.5 billion outstanding TARP funds. KeyCorp has said it is on more solid footing than some competitors so it shouldn't have to raise much capital to repay the funds.

Fifth Third Bancorp (FITB), another large regional, has repaid its TARP funds. Fifth Third Chief Financial Officer Daniel Poston said at a conference earlier this month the bank intends to "return in the near term" to a more normal dividend.

Some of the 19 likely to be granted permission for a dividend raise, analysts say, include PNC Financial Services Group Inc. (PNC), American Express Co. (AXP), Bank of New York Mellon Corp. (BK) and State Street Corp. (STT).

BB&T Corp. (BBT) said earlier this month that it should be in the first group approved for a dividend increase.

"By permitting selected banks to increase dividends, the Federal Reserve is signaling the banking industry's capital strength has made a remarkable comeback," Gerard Cassidy, a banking analyst with RBC Capital Markets, said in a note to clients.

Banks are likely to restore dividends to payout ratios of 20% to 30% of earnings, according to analysts. J.P. Morgan CEO Jamie Dimon said he hoped to achieve a payout ratio of 35% eventually, but added "J.P. Morgan won't rush into anything."

For many banks, a dividend boost could be a welcome event for investors knocked down by share price erosion in the last few years. Bank of America Corp.'s (BAC) shares, at $13.98 on Thursday, are down nearly 60% from June 2008. The bank has slashed its dividend twice since the crisis in the autumn of 2008, cutting it to 1 cent a quarter in March 2009.

Bank of America has said it doesn't plan a dividend increase until the middle of 2011.

Card issuer Capital One Financial Corp. (COF) is likely to raise its dividend in mid-2011, analysts say.

Investment banks Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) aren't in the same category. Goldman Chief Financial Officer David Viniar recently told analysts the firm is more inclined to buy back its shares. Goldman is looking for a green light from the Fed to pay back a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) made during the financial crisis.

Morgan Stanley hasn't publicly discussed raising its dividend, but is instead focused on buying from Citigroup the remaining stake of its brokerage joint venture with Smith Barney and reallocating its capital in client businesses.

MetLife Inc. (MET), the only insurer to be included in the stress test, has historically paid an annual dividend in the fourth quarter. But Chief Financial Officer Bill Wheeler said at an investor conference in February the company couldn't move forward on any capital management actions, including buybacks, until passing the stress test. Assuming MetLife passes the stress test, Wheeler said, "I think we'll be more aggressive on sort of an annual dividend now and relatively less aggressive on buyback activity."

The Wall Street Journal reported Thursday that Ally Financial, the auto lender among the 19 largest banks, still on the hook for billions in U.S. aid, won't get a definitive answer from the Fed for some months.

-By Brett Philbin, Matthias Rieker, David Benoit, and Liz Moyer, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

--Erik Holm contributed to this article.

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