While all of the banks involved in this year's stress tests appeared to pass at least theoretically, winners and losers will emerge in the race to return capital to shareholders.
Bank stocks Friday moved lower, a day after the Federal Reserve released results of its annual measure of financial institutions' ability to withstand crisis scenarios. The sector went from being the market's strongest performer at the open to one of the biggest drags as investors and analysts digested the test results.
The Fed doesn't officially give banks pass or fail grades on the Dodd-Frank Act Stress Tests, or DFAST. Instead, it uses them as a baseline for a second round of analysis that determines whether plans to return capital to shareholders will be approved.
Analysts roundly expect a substantial increase in cash payouts this year compared with 2016.
"Apart from several exceptions, most results were largely in-line with our expectations," Compass Point Research analysts said in a note. "The results reinforce current market expectations for higher combined payout ratios in this year's cycle."
The market will be watching one key metric closely — how many banks will return more than 100 percent of earnings. In essence, that means those banks will dip into cash reserves for payouts, a key measure of their own confidence as well as that of regulators in the institutions' safety.
Of the 34 banks that participated in DFAST — the number will be slashed to 13 next year — consensus is that 10 or 11 of them will exceed the 100 percent threshold, up from just four in 2016.
Some of the big winners in terms of payout ratios look to be Regions Financial [124 percent], Citigroup [124 percent] and Discover Financial Services [114 percent], according to projections from Goldman Sachs. Keefe, Bruyette & Woods adds Goldman [136 percent] to the list of big payers and forecasts the payout ratio for CIT Group to be a gaudy 157 percent.