As markets grapple with the impact of the Japanese quake and tsunami, the unrest in the Middle East, the euro debt crisis and worries about the strength of the US recovery, a bonus may be about to be delivered by the US Federal Reserve.
Some time in the next few days, possibly within the next 24 hours, America’s 19 biggest banks will learn the results of the latest stress tests conducted by regulators.
The Fed’s Open Markets Committee meets tonight, our time for its latest monetary policy move.
Although this committee won’t be making the decision, it will have input.
By next Monday the Fed will have to have told those banks and other financial groups that got help in 2007 from the so-called Tarp fund, if they can increase dividends and start share buybacks once again.
American banks paid out nearly $US54 billion in cash dividends in 2010, compared to $US110.3 billion in 2007, the year before the crisis fully took hold.
Many are still paying a cent a share.
Although the move has been well anticipated by the market, thanks to moves by Bank of America and Goldman Sachs, a positive decision in both cases will trigger a rise in financial stocks on Wall Street.
Financial stocks are the second biggest group in the Standard & Poor’s 500 index so a strong rise could have a substantial follow-on impact.
Banks and insurers have been eager to reduce massive capital cushions they built up as they recover from the 2007-2009 financial crisis, but regulators have been nervous about letting them draw down those reserves to return to shareholders.
Goldman Sachs has already signalled that it wants to buy back the $US5 billion of securities sold to Warren Buffett in late 2008.
He said in the Berkshire Hathaway annual report last month that he was resigned to having these securities bought back by Goldman Sachs, thereby removing the lucrative 10% a year interest income from his accounts (which is why Goldman wants to buy them back).
Among the banks US analysts said are most likely to be given the green light to boost dividends or buy back shares are US Bancorp, Wells Fargo, JPMorgan Chase and PNC Financial Services Group Inc.
A problem for Goldman Sachs is the lingering stench over its name among many ordinary Americans, while Bank of America will have to endure the release, Wikileaks style, has a host of documents overnight claiming malpractice in its home mortgage business and insurance.
Bank of America has already gone and forecast a 30% rise in dividend next year while even struggling Citigroup reckons it will be in a position to pay one next year.
That 30% forecast from B of A looks like being an industry attempt to set a level below the 50% payout before the crunch, but at a level to please big investors and the Fed.
Bankers have said they do not expect the Fed to announce the results publicly, leaving each institution to decide what information they will share with investors, and when they will offer these details.
Given the interest from an investment community still relatively underweight financials, it may be difficult for any of the 19 companies to remain quiet.
In guidance released in November the Fed said it planned to inform banks of their test results no later than next Monday, March 21.
Analysts discount the chances that the Fed will not allow any bank to boost their dividend because that would suggest a lack of confidence in the economy and the industry that could rattle markets.
Equally a limited list of approvals could also raise concerns for those banks not on the list.
