The Federal Reserve has approved most of the big U.S. banks’ capital plans, including Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc. (NYSE:C). With these Fed approvals, investors might see significant share buybacks and dividend payments from those three banks in 2013. Are these major U.S. banks investment opportunities after they passed Fed stress tests? Let’s find out.
Bank of America Corp (NYSE:BAC) – Largest deposit base with decent total yield
Bank of America is considered to have the largest deposit base among the three big banks, with more than $1 trillion in deposits in 2012. In the third quarter of 2012, Bank of America Corp (NYSE:BAC) had a Tier 1 common ratio of 11.4% and a Tier 1 capital ratio of 13.6%. Under the severely adverse scenario of Federal Reserves’ estimates, its projected Tier 1 common ratio would be 6.9%, while its projected Tier 1 capital ratio would be 8.5% in the fourth quarter of 2014. Bank of America intended to repurchase $5 billion in common stock and redeem about $5.5 billion in preferred stocks (both a 8.2% Series H and 8.625% Series 8). A $5 billion buyback could retire as much as 3.7% of its total shares outstanding in the next twelve months. At the current price of around $12.50 per share, its total market cap is around $135 billion. The market values Bank of America Corp (NYSE:BAC) at 9.6 times forward earnings and 0.6 times its book value. The dividend yield is at 0.3%. Thus, the total yield (share buybacks + dividends) is around 4%.
Citigroup Inc. (NYSE:C) – not exciting enough
Citigroup had a higher Tier 1 common ratio and Tier 1 capital ratio than Bank of America. In the third quarter 2012, Citigroup had 12.7% in Tier 1 common ratio and 13.9% in Tier 1 capital ratio. Under the Fed’s severe adverse scenario assumption, Citigroup would be still strong with 8.9% Tier 1 common ratio and a 9.8% Tier capital ratio in the fourth quarter of 2014. Citigroup Inc. (NYSE:C) plans to repurchase $1.2 billion of stock in 2013. At $46 per share, Citigroup Inc. (NYSE:C) is worth nearly $140 billion on the market. It is valued at 8.8 times forward earnings and 0.8 times its book value. Its dividend yield is very small at only 0.1%. As a $1.2 billion share buyback would generate an additional 0.85% yield to shareholders, its total yield is only 0.86%.
Wells Fargo – The highest total yield
Wells Fargo had the lowest Tier 1 ratio among the three. Its third quarter Tier 1 common ratio and Tier 1 capital ratio were 9.9% and 11.5%, respectively. In the severe adverse conditions, its Tier 1 common ratio would be 7% and its Tier 1 capital ratio would be 8.7% in the fourth quarter 2014. Interestingly, Wells Fargo has experienced a decent growth in its core deposits, from $864.9 billion in 2011 to $928.8 billion in 2012. The bank plans to increase its dividend to $0.30 per share for the second quarter of 2013. The amount of stock repurchase in 2013 would also be higher than that in 2012. In 2012, it bought back around $4 billion worth of shares. Thus, if we assumed that Wells Fargo could spend $4 billion in share repurchase, its repurchase yield would be 2%. At $38 per share, Wells Fargo has a total market cap of around $200 billion. The market values Wells Fargo at 9.5 times forward earnings and 1.4 times its book value. With the new increased dividends, its forward dividend yield is 3.2%. Thus, Wells Fargo’s total yield is the highest among the three, at 5.2%.
Foolish bottom line
Among the three mega-banks, I like Bank of America Corp (NYSE:BAC) and Wells Fargo due to its high total yield, including dividends and share buybacks. Bank of America has the lowest valuation and its earnings power had been hidden by the large loan loss provision. Wells Fargo is still the most favorite bank of legendary investor Warren Buffett. He owned nearly 440 million shares in the bank, accounting for 20% of his total portfolio.
The article Are These Three Mega-Banks Attractive for 2013? originally appeared on Fool.com and is written by Anh HOANG.
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