In the aftermath of the 2008 financial crisis, every large U.S. bank has to undergo the Federal Reserve’s annual stress tests. With those results in mind, we’ve spotted several attractive bank stocks that are great buys now.
In the stress tests, the central bank determines if the nation’s major financial institutions are adequately capitalized, to handle a future economic downturn. Passing the stress test is a prerequisite in order for banks to increase their capital allocation programs.
Every large bank passed the Fed’s stress test this year. The following three banks were among the standout performers, and allowed to increase their dividends and share buybacks by a hefty margin.
These three bank stocks are attractive for investors looking for high dividend yields, and exposure to the financial sector.
Big Bank Stocks: JP Morgan Chase (NYSE: JPM)
JP Morgan, the largest U.S. bank by assets, passed the Fed’s stress test with flying colors. As a result, it is about to shower its investors with cash. Not only did JP Morgan raise its dividend by 12%, but it also authorized up to $19.4 billion of share repurchases, through June 30, 2018. That makes it quite attractive among big bank stocks.
JP Morgan can do this because its fundamental performance has improved significantly in recent years. For example, in 2016 JP Morgan grew revenue and earnings by 2% and 3%, respectively. The major contributor to this growth was a 5% increase in net investment income.
The key factors for JP Morgan moving forward are its consumer franchises, as the company has a massive consumer business. This segment posted 14% growth in loans, and 11% growth in deposits in the fourth quarter of 2016. Separately, commercial banking revenue rose double-digits last year, which means the bank is performing well across its business segments.
JP Morgan stock has a current dividend yield of 2.4%.
Big Bank Stocks: Wells Fargo (NYSE: WFC)
Wells Fargo has endured a tumultuous year, but it is slowly getting itself back on track. Investors may recall that the company was hit with a $185 million fine because employees had opened millions of accounts for its customers without their consent. The scandal resulted in a PR nightmare for the company, and culminated with the CEO losing his job.
This resulted in a weak performance in 2016. Revenue increased 2.6% for the year, earnings fell by 3%. Fortunately, the negative headlines have faded over the course of 2017, and the company got the green light to raise its dividend. While it amounts to just a 1% increase, Wells Fargo still offers a hefty dividend payout of 2.7%.
Wells Fargo remains a strong brand, with plenty of opportunities for future growth. As the largest mortgage originator in the U.S., Wells Fargo stands to benefit from higher mortgage rates. Rising interest rates have resulted in higher mortgage rates over the past year, which will help Wells Fargo substantially increase its return on assets. This could help bring about even higher dividend growth in the years ahead.
Big Bank Stocks: Citigroup (NYSE: C)
Among the big bank stocks, Citigroup’s financial performance has improved dramatically. For example, first-quarter revenue increased 3% from the same quarter last year, due to growth in the Institutional Clients Group and its Global Consumer Banking business. This drove 23% growth in earnings per share for the quarter. The company maintained a Common Equity Tier 1 ratio of 12% in the first quarter, which is a very strong performance.
After passing the Fed’s stress test, Citigroup doubled its dividend, to $0.32 per share quarterly. Citigroup handed out one of the biggest dividend increases of any bank. The dividend increase takes Citigroup’s dividend yield to nearly 2%.
In addition, Citigroup unveiled a new a common stock repurchase program, of up to $15.6 billion. This is a very significant buyback, amounting to 8% of the company’s current market capitalization. Such a huge buyback will provide a massive tailwind to Citigroup’s earnings per share growth, since fewer shares outstanding will receive a higher portion of earnings.
JP Morgan and Citigroup announced their largest share buyback authorizations ever. This indicates the U.S. financial sector is back to full health, and should only continue to improve, as interest rates rise. Citigroup will be a major beneficiary of higher interest rates, as it will earn more on its loans, relative to smaller increases in interest on deposits.