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Stress Test Winners: PNC, FITB; Losers: BofA, Citi, Morgan Stanley

The Fed’s bank stress tests long have been thought of as little more than a pro forma exercise to let Wall Street’s lucky and leveraged start to increase dividend payouts, but the lists of winners and losers could get interesting.

While at least four of the 19 banks that were tested under the new Basel III rules were considered lead-pipe cinches for approval, others were on the bubble. Results are expected to come today.

In a note out this morning, banking analyst Keefe, Bruyette & Woods speculates that PNC and First Third could post surprise dividend increases—surprising particularly in PNC’s case because it does not appear on the surface to meet the 7 percent Tier 1 capital ratio that Basel III mandates.

Instead, KBW believes PNC will be able to sell some weighty assets and finagle its way into the Fed’s good graces.

Should both companies increase dividends, KBW thinks they could be the two big market-movers from the stress tests.

“First, we believe PNC has strong financial flexibility which may be borne out in the stress test. For example, we believe Basel III’s treatment of the ownership of BlackRock and lowly rated structured securities will likely be more onerous for PNC than in the Fed’s stress test, which may assume a stressed market value for these securities. Moreover, PNC could dramatically improve its Basel III ratios by selling these securities, albeit at a potentially negative impact to earnings,” the firm writes.

“Second, PNC has strong earnings power and capital generation capabilities. PNC has consistently reported a pretax preprovision ROA above 2% and a return on tangible capital in the mid-teens. As a result, we are forecasting the quarterly dividend to increase to $0.35 from $0.10 per share, or a 2.25% dividend yield.”

Among the other winners: Goldman Sachs, JPMorgan Chase, USBancorp, Wells Fargo and Capital One Financial.

On the flip side, KBW sees bad news for Bank of America, Citigroup and Morgan Stanley—all key members of the too-big-to-fail club who have been trying to regain investor confidence since the financial system began crashing three years ago.

BofA and Citi likely will be able to start dividend increases in 2012, KBW says, but offers no prediction for when Morgan Stanley will be able to join the party.

UPDATE: JPM, USBancorp, and Wells Fargo have announced dividend increases and buybacks. BB&T announces dividend increase. Also, CNBC's Mary Thompson reporting that BAC may hike in the second half of the year.

UPDATE II: PNC gets OK for dividend increase but says it will address in the second quarter. Capital One surprises by saying it will maintain dividend. Bank shares continue to lead rally.

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Companies mentioned in this post

Goldman Sachs

JPMorgan Chase

USBancorp

Wells Fargo

Capital One Financial

Bank of America

Citigroup

Morgan Stanley

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