Big banks are on the cusp of releasing tens of billions of dollars more in stock buybacks and dividends to investors, according to analysts. Results from the Federal Reserve 's bank stress tests are scheduled to be released Thursday after the close of regular trading. The annual ritual, which tests how banks fare during various hypothetical economic downturns, has typically been followed by statements from banks saying how much capital they can release in the form of dividends and buybacks. Banks are planning to disclose their capital return plans on Monday afternoon, according to people with knowledge of the matter at five of the biggest U.S. lenders. That gives institutions a few days to adjust their plans after receiving the regulator's results, said two of the people. Thanks in part to massive support from the Fed last year, U.S. banks have fared far better than feared at the start of the global pandemic. The industry built its biggest loan loss reserves since the 2008 financial crisis, but most of those losses didn't actually happen. Banks were also forced to suspend buybacks and freeze dividends , moves that allowed them to stockpile larger capital cushions. It's against that backdrop that most or all banks taking the exam are expected to pass, according to Edward Jones bank analysts Kyle Sanders and Jim Shanahan. "Investors can relax when it comes to this year's stress test," Sanders said in an interview. "The banks have been extremely resilient during the pandemic, and they're very eager to return capital to shareholders." Total payouts for the six-biggest U.S. banks are expected to jump by as much as $130 billion in the next 12 months, according to Evercore ISI analyst Glenn Schorr. The top 20 banks could return almost $200 billion in buybacks and dividends, according to Barclays analysts. Dividends will likely climb by at least 10% at most banks, according to Sanders. One standout may be Wells Fargo , in part because last year it was forced to slash its dividend to 10 cents a share, he said. "I think Wells might be the standout in terms of just the biggest amount of dividend increase and most potential for share buybacks," Sanders said. "They easily have a lot more capacity to raise their dividend to 20 cents or 25 cents a share, that's a 100% or 150% increase they can easily absorb." Another factor likely to power share repurchases is that while banks are generating large profits, loan demand is tepid. This gives bank executives few other avenues to deploy capital, Shanahan said. For the 2021 stress test, a scenario banks must plan for includes U.S. unemployment at 10.8%, a milder drop than the December version of the test. There is also a bigger focus on commercial investments that may decline in value and harsher assumptions for international markets, according to the Edward Jones analysts. The latest test marks a milestone for the once-beleaguered industry. For more than a decade, banks had to submit their annual capital plans for Fed approval, a process that limited options and occasionally tripped up the companies. Now, banks will be guided by something known as their stress capital buffer, a measure of capital each firm should carry based on the riskiness of their operations. This new regime was supposed to start last year, but the pandemic effectively delayed that. "So long as they stay above that stress capital buffer requirement and all their other requirements every quarter, a bank can technically do whatever it chooses to do with regards to buybacks and dividends," Jefferies bank analyst Ken Usdin said, But unless banks announce far bigger capital plans than expected, investors have mostly factored in higher payouts, Usdin said. The KBW Bank Index has climbed 27% this year, double the roughly 13% return of the S & P 500. Future catalysts for share performance include higher interest rates and loan growth as the economic recovery develops, he said. "It's more about confirming the data point that banks are getting back to owning control of these decisions," Usdin said. "The biggest lift you could get for banks is from higher interest rates; everyone who owns banks hopes that rates go up."
