Other industry experts, however, see the problems as reaching beyond the boardroom and into the halls of Congress and the Federal Reserve, both of which put tight reins on banking after the damage done during the financial crisis.
“The Street has turned the [stress test] process into a way of justifying greater cash return, and I’m not sure that’s appropriate,” said Christopher Whalen, head of Whalen Global Advisors. “But this is the house the Fed has built, so they have to live in it.”
Indeed, the Fed is the final judge over the capital proposals. While the central bank has been vocal in terms of its desire to make sure banks are safe, the thinking is that most if not all the tested institutions will get the OK this time around.
Former FDIC Chair Sheila Bair worries about the Fed’s willingness to approve the capital plans. In a post for American Banker, Bair said she “would advise extreme caution for payouts in excess of earnings,” reasoning that for some banks the capital returns might not leave enough left over should a crisis hit.
Still, Keefe, Bruyette & Woods estimates 11 banks will get approval to dispense more than 100 percent of profits — a significant landmark for the businesses to begin dipping into their cash stockpiles. Banks have $2.11 trillion stored at the Fed in excess reserves alone, a number that is just shy of $2 trillion more than required.
The big cash return “is the upside to the view by many investors that banking is becoming a utility!” KBW analyst Fred Cannon said in a note.
“In our view the best strategy for most banks is to establish a sustainable regular dividend that can be increased over time and a share repurchase program that returns capital in excess of investment opportunities and dividends to shareholders,” Cannon added.
As long as banking is treated as a utility — Bove contends the industry has been effectively nationalized — the hopes for organic growth may go unfilled, at least for the largest institutions.
“I think it is very limited. M&A is the only way you can show top-line growth, but the deals aren’t obvious,” Whalen said. “The curse of regulation is that you can”t innovate. None of these big banks or big financials generally can really be that flexible in how they run their businesses, because they have this top-down template from the regulators. They are forced to run their businesses to suit the regulatory environment.”
Watch: Dick Bove gives his advice on which banks to buy after the stress tests.