Banking Stocks Are in the Spotlight after Fed’s Stress Tests

The world’s banking giants that also operate in the United States are making headlines today, after the Federal Reserve announced the results of its second round of stress tests yesterday after the closing bell.

The stress tests are designed to check a bank’s ability to survive a severe economic or market shock. Performing these tests allows the regulator to ascertain whether banks can raise dividends and/or initiate share buyback programs without putting too much strain in their capital buffers. This year, 31 out of 33 major banks active in the US managed to pass the test. Let’s have a look at some of the banks that aced the review and those that failed.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see more details here).

Kevin George/Shutterstock.com

BofA Gets The Nod

Bank of America Corp (NYSE:BAC) is in the spotlight today for a good reason. After failing to cleanly pass the Federal Reserve’s stress tests for two years in a row, BofA finally managed to ace the review this year. Shares jumped roughly 4% on Wednesday and are up by 1.3% this morning in pre-market trading. Nevertheless, the stock is still down by approximately 19% for the year. Bank of America Corp (NYSE:BAC) CEO Brian Moynihan has made a promise to return more capital to shareholders and passing the stress tests was crucial to unlocking the necessary funds. Withing minutes of the announcement, BofA said it will increase its dividend by 50% and start a plan to buy back $5 billion worth of stock. At the end of the first quarter, Bank of America Corp (NYSE:BAC) was the most popular financial stock among the funds followed by Insider Monkey, with 110 of them having reported a stake in the company.

Citigroup Is More Generous

Citigroup Inc (NYSE:C), America’s fourth biggest bank by assets, also got the green light from the Federal Reserve, paving the way for a boost in dividend and share repurchase program. The company was more generous that BofA, boosting its dividend more than threefold to $0.16 per share, up from $0.05 per share. Citigroup Inc (NYSE:C) also said it plans to increase its share buyback program to $8.6 billion during the next 12 months, up from $7.8 billion announced a year ago. In other news, German banking software company Wirecard AG has agreed to buy Citi’s Prepaid Card Services, as the US giant follows JPMorgan Chase & Co. (NYSE:JPM) out of the business. No terms of the agreement have been disclosed so far. In terms of popularity among top hedge funds, Citigroup Inc (NYSE:C) is just behind BofA, with 101 funds tracked by Insider Monkey invested in the stock at the end of March.

On the next page we discuss the two losers and one bank that got a conditional pass.