Bernstein Sees Buybacks From Banks But Not BAC

With fourth-quarter earnings season in the rearview mirror for the largest U.S. financial institutions, Bernstein Research is out with a note Monday refreshing its take on the capital return outlook for 2012. Not surprisingly, the firm expects the banks that sustained less damage in the financial crisis to be at the forefront of returning cash to shareholders.

Looming over all is the Federal Reserve�s ongoing evaluation of the capital plans submitted by America�s 31 biggest banks, the so-called �stress tests� that firms ran their businesses through in order to determine how much capital they would need to withstand a credit freeze akin to 2008 or a breakdown in Europe�s sovereign debt crisis. (See �The Fed�s 2012 Stress Test Recipe.�)

A number of firms reported stronger capital levels in the fourth quarter, but it remains to be seen how much weight the Fed will give those results considering the Jan. 9 stress test deadline came before results were released publicly.

Among those with improving capital positions is Bank of America, but Bernstein analyst John McDonald says the hurdle for the company is very low: merely passing the Fed�s stress test without being instructed to raise more capital. Returning capital to shareholders is likely more of a 2013 story at the Charlotte-based bank. Bernstein expects the company�s dividend payout ratio for 2012 to be just 5%, versus around 25% for the likes of JPMorgan Chase and Wells Fargo, and share buybacks to be on hold for at least another year.

That won�t be the case at other banks though, with JPMorgan expected to lead the pack. Bernstein expects Jamie Dimon�s firm to buy back up to 6% of its shares in 2012, followed by Wells Fargo, US Bancorp and Citigroup, each buying between 2% and 2.5% of outstanding stock and marking a return to the buyback form of capital return for the latter after a year without repurchase authorization in 2011.

On an overall basis, Bernstein expects the biggest capital return ratios to come from JPMorgan (79% of earnings), US Bancorp (52%) and Wells Fargo (42%). PNC Financial Services and Citi are expected to return about 25% of 2012 earnings per share, while BofA�s return is expected to trail the pack at just 5%.

Bank stocks were in the red Monday as the broader market stumbled, but are still comfortably higher year-to-date. BofA lost 3%, Citi 2.1% and JPMorgan 1.2%. Wells Fargo was off 1.6% and PNC slipped 0.5%, while US Bancorp dipped just 0.1%.