Investors in U.S. bank stocks may be in for a volatile ride over the next two weeks as the Federal Reserve releases results of its annual stress tests of bank capital in two steps.
Late on Thursday, the agency is expected to reveal how much capital 18 large banks would maintain under a hypothetical severe economic downturn. A week later, the Fed plans to disclose how the banks would have fared if they had first spent some of their capital buying back shares or paying higher dividends.
Among the banks that will be closely watched are Bank of America and Citigroup, which have stumbled in past tests and have had quarterly dividends stuck at a penny per share since the financial crisis.
If banks pass Fed muster, they will be allowed to go ahead with plans to increase payouts and repurchase more shares. Last year, the Fed disclosed all of the information on the same day.
During this year's one-week gap, bankers are worried that their stocks could face volatile swings as analysts and investors try to guess how much capital banks will be able to return to shareholders over the next year. Stocks could also fluctuate if banks exceed or miss expectations for how they will score in the first phase of the test, the bankers said.
"I'd much rather get all the information in one fell swoop," said Frank Barkocy, director of research at Mendon Capital Advisors, which invests in bank stocks. "It does create some air of uncertainty, and uncertainty usually results in volatility."
Barkocy said it's also possible that information could leak out during the interim week. The Fed will provide banks with preliminary information about their capital plans this week, but it's considered confidential supervisory information.
It would be "much cleaner" if the Fed were to release both parts on one date, bank analyst Vivek Juneja of JPMorgan said in a research report.
The two-step process was created because this year banks will get a one-time chance to lower their requests for dividend increases and buybacks once they know how they fared in the stress test. The Fed declined to comment on the possibility of volatile stock prices during the one-week period.
Bank stocks have enjoyed a strong run, with the KBW Bank Index climbing more than 30 percent last year and another 6 percent this year. Analysts said they aren't expecting the test results to provide a major boost to shares, but said investors could be disappointed if banks return less capital than expected or have their requests rejected by the Fed.