The second round of bank stress test results will be released tomorrow. It’s the important round because the Federal Reserve will reveal if and what level of dividends and buybacks are approved for the Bank Holding Companies involved in the tests.
The options market has implicit pricing for expected dividends based on how the forward price of a stock is calculated. That’s a discussion that we will revisit in the future, but for now, suffice it to say that the options market has already priced in some expectation of dividend increases for the large banks. Since it’s a market-based expectation, it’s a useful benchmark against which to gauge whether the banks exceed market expectations on their dividend increases tomorrow or not.
The 18 BHC’s involved, and the market’s expected quarterly dividend for the balance of 2013:[private]
1) ALLY – Not yet listed
2) AXP – 0.22 (vs. most recent div of 0.20)
3) BAC – 0.04 (vs. most recent div of 0.01)
4) BK – 0.15 (vs. most recent div of 0.13)
5) BBT – 0.23 (vs. most recent div of 0.23)
6) COF – 0.20 (vs. most recent div of 0.05)
7) C – 0.01 (vs. most recent div of 0.01). C already announced that it only asked for 0.01
8) FITB – 0.12 (vs. most recent div of 0.10)
9) GS – 0.50 (vs. most recent div of 0.50)
10) JPM – 0.35 (vs. most recent div of 0.30)
11) KEY – 0.06 (vs. most recent div of 0.05)
12) MS – 0.05 (vs. most recent div of 0.05)
13) PNC – 0.45 (vs. most recent div of 0.40)
14) RF – 0.04 (vs. most recent div of 0.01)
15) STT – 0.26 (vs. most recent div of 0.26)
16) STI – 0.15 (vs. most recent div of 0.05)
17) USB – 0.24 (vs. most recent div of 0.195)
18) WFC – 0.27 (vs. most recent div of 0.25)
So the market is expecting major increases from BAC, COF, RF, and STI on the dividend front, relative to their most recent dividend payments. The market is expecting a gradual increase for most other bank names, which leaves room for positive surprises in the case of large buyback announcements or special dividends (as WFC did after last year’s stress test, paying a 0.10 special dividend, more a signal of strength than any large payout).
The financials have rallied strongly into the announcement, so some of the good news might be priced in. But the above summary is a good guide to figure out which announcements are actually a surprise, vs. simply matching the market’s expectations.[/private]