Banks Boost Payouts After Clearing Fed Tests: 5 Great Picks

At the conclusion of the Federal Reserve’s seventh annual Comprehensive Capital Analysis and Review (CCAR), all of the participating banks received welcome news. After clearing the first round of these stress tests last week, the central bank cleared all the 34 largest U.S. banks’ capital plans. This was the first time that the Fed raised no objection to any of these plans ever since the tests were instituted in the aftermath of 2008 Great Recession.

Big banks promptly announced a windfall for their shareholders with dividend hikes and repurchase programs. The Financials Select Sector SPDR (XLF) increased 1.6% on Jun 28, on expectations that banks would clear the Fed’s tests with flying colors, a fact which was confirmed after trading hours.

The day’s events add to the optimism created by recent legislative developments which seeks to curtail strictures placed on the financial sector. Such efforts would gain strength now that banks have proved their financial robustness, which makes it a great time to pick up stocks from the sector.

Capital One Falls Behind

At the end of its rigorous capital adequacy tests, the Fed cleared the capital plans of all the banks under review except one. Capital One Financial (NYSE:COF) Corporation (NYSE:C) failed to clear the tests, with the Fed stating that its capital planning process suffered from serious weaknesses. The central bank alluded to the risk of losses for one of its major line of business, which market watchers believe is a reference to its credit card division.

Even so, Capital One has received the Fed’s approval to proceed with its capital plans though it must provide a revised proposal by the end of the year. As a result, Capital One has elected to keep its dividend unchanged though it is proceeding with a share repurchase plan worth $1.85 billion.

Banks Raise Dividends, Announce Repurchases

For the wider industry, however, it was a day to celebrate. Investors of Citigroup Inc. (NYSE:C) possibly received the greatest reward with the bank raising its dividend twofold to 32 cents per common share. Additionally, a share repurchase program of $15.6 billion was announced, which market watchers stated was the largest in the bank’s history.

Meanwhile, JPMorgan Chase & Co. (NYSE:JPM) increased its quarterly dividend to 56 cents a shares and announced a buyback program of $19.4 billion. Bank of America (NYSE:BAC) Corporation (NYSE:C) followed suit, raising its dividend to 12 cents a share and authorizing the repurchase of shares worth $12 billion. Morgan Stanley (NYSE:MS) said it would be raising its dividend from 20 cents a share to 25 cents a share and increased its share repurchases from $3.5 billion to $5 billion.

Banking Sector in Better Shape

The first round of the Federal Reserve’s stress tests was intended to determine whether banks’ current level of capital reserves can withstand a severe recession. All thirty four of the largest banks “passed” having more than minimum capital and leverage ratios under severe adverse situations. (Read: Big Banks Pass Fed's "Stress Test": 3 Top Winners)

Now, the results of the second round of tests have dispelled all doubts about the health of the banking sector. This is because the 34 banks which were scrutinized together hold in excess of 75% of the sector’s total assets. As of the fourth quarter of 2016, banks held capital reserves amounting to $1.2 trillion. This represents an increase of $750 billion from the level witnessed during early 2009, when the crisis intensified.

Moreover, banks are expected to return 100% of their net revenue to shareholders over the four upcoming quarters. This represents a significant improvement when compared to the level of 65% witnessed during the same quarter last year.

Our Choices

Taken together, stress test related developments have provided the financial industry a strong reason to assert the need for removal of restrictive regulations. They would also likely add further weight to the Trump administration’s attempts to undo the Dodd-Frank set of reforms. (Read: 5 Bank Stocks to Buy as House Cuts Dodd-Frank Reforms)

Adding banking stocks to your portfolios makes for a smart choice at this time. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

State Bank Financial Corporation (NASDAQ:STBZ) through its subsidiary provides community banking services to individuals and businesses in the middle Georgia and metropolitan Atlanta markets.

State Bank Financial has expected earnings growth of 13.9% for the current year. Its earnings estimate for the current year has improved by 1.6% over the last 30 days. It has a dividend yield of 2.1%. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Southside Bancshares, Inc. (NASDAQ:SBSI) through its subsidiary banks is primarily engaged in commercial banking and providing trust services.

Southside Bancshares has a Zacks Rank #2 (Buy) and its projected growth for the current year is 20.1%. Its earnings estimate for the current year has improved by 3% over the last 30 days. It has a dividend yield of 3.2%.

BOK Financial Corporation (NASDAQ:BOKF) through its subsidiaries provides a wide range of financial services to commercial and individual customers, other financial institutions and consumers throughout Oklahoma, Texas, Arizona, Colorado, New Mexico and Kansas.

BOK Financial has a Zacks Rank #2 and its projected growth for the current year is 49%. Its earnings estimate for the current year has improved by 0.7% over the last 30 days. It has a dividend yield of 2.1%.

Preferred Bank (NYSE:C) is one of the largest independent commercial banks in California focusing on the Chinese-American market.

Preferred Bank has a Zacks Rank #2 and its projected growth for the current year is 19.9%. Its earnings estimate for the current year has improved by 0.6% over the last 30 days. It has a dividend yield of 1.5%.

Old Line Bancshares, Inc. (NASDAQ:OLBK) is the parent company of Old Line Bank which offers banking services and products to individual and business customers.

Old Line Bancshares has a Zacks Rank #2 and its projected growth for the current year is 25.4%. Its earnings estimate for the current year has improved by 1.7% over the last 30 days. It has a dividend yield of 1.2%.

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