Bank stocks and exchange traded funds got some got news last week when the Federal Reserve revealed that all 31 large financial institutions subject to the central bank’s stress tests passed.
The largest U.S.-based banks “continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility,” the Fed said. [Financial ETFs Survive Stress Tests]
The Fed revealed that all 31 big banks had sufficient capital to absorb losses during a potential economic downturn, marking the first time the central bank found no firms below the main capital thresholds, Bloomberg reports.
Attention has turned to which banks will reward shareholders with increased buybacks and dividends, The banking team at Jefferies believes “that four banks shareholders’ have the potential to see the biggest increases in dividends paid to them,” reports Lee Jackson for 24/7 Wall Street.
One member of that quartet is Citigroup (NYSE: C), which surprised some market observers by passing the stress test. Jefferies believes Citi could announce a buyback and with an annual dividend of just 4 cents a share, good for a palty yield of 0.1%, there is ample room for Citi’s payout to rise.
Scores of financial services ETFs feature Citi as a top 10 holding, but one to keep an eye is the PowerShares KBW Bank Portfolio (NYSEArca: KBWB). Indeed, the $277.4 million KBWB features an 8% allocation to Citi, making the stock the ETF’s second-largest holding behind Wells Fargo.
However, KBWB also features solid combined exposure to the some of the other banks Jefferies as improving shareholder rewards. Those names Citizens Financial (NYSE: CFG), Regions Financial (NYSE: RF) and SunTrust (NYSE: STI), reports 24/7 Wall Street. SunTrust is KBWB’s sixth-largest holding at a weight of 4.9%. Regions accounts for 3.6% of the ETF’s weight.
SunTrust currently yields less than 2%, but Jefferies sees the bank’s payout ratio rising to 70%, according to 24/7 Wall Street.
Although KBWB features ample exposure to the largest U.S. money center banks, investors in the ETF would do well to listen closely to what the Federal Reserve is saying about interest rates. The reason being is that about half of the ETF’s 24 holdings are regional banks and that does not include the super-regionals held by the fund, such as U.S. Bancorp (NYSE: USB) and SunTrust. [Inside a Fast-Growing Bank ETF]
In addition to banks that are expected to be new dividend raisers, KBWB features robust exposure to the well-capitalized banks that in recent years have repaired their reputations for consistent dividend growth. For example, Wells Fargo, Dow component J.P. Morgan Chase (NYSE: JPM) an U.S. Bancorp combine for 22.9% of KBWB’s weight. [Another Bank ETF on the Rise]
Over the past four years, U.S. Bancorp’s dividend has nearly doubled while J.P. Morgan’s payout is up almost 60%. Wells Fargo’s dividend has nearly tripled over that period.
PowerShares KBW Bank Portfolio
