Wall Street expects bank stocks to climb now that the Federal Reserve has approved their plans to make big increases in payouts to shareholders.
"Investors should benefit from meaningful capital returns over the next 4 quarters, while the regulatory backdrop continues to improve," Barclays managing director and senior equity analyst Jason Goldberg said in a Thursday report.
The 22 banks Barclays covers have committed to return $130 billion of capital to shareholders in dividends and share repurchases, he said in the note.
He expects the median payout ratio of banks to hit 97 percent of profit over the next 12 months, which would be the second-highest level in at least 20 years. The last time the payout ratio was higher was in 2007, when bank earnings dropped in the second part of the year as the financial crisis began to unfold.
Source: Barclays Research, S&P Global Market Intelligence and company reports
Barclays expects Regions Financial, Citigroup, Fifth Third Bancorp, Bank of New York Mellon, Goldman Sachs and JPMorgan Chase to have the highest gross share repurchase payout ratios at more than 75 percent each.
Financial stocks have struggled so far this year amid delays in passing new legislation that would reduce tax rates and loosen regulation on the industry. Thursday's gains nudged the sector to only the fourth worst in the S&P 500 this year, while technology stocks remained the best performer for 2017.
The Fed on Wednesday did not object to the capital return plans for the 34 banks it reviewed in the second of an annual two-part test to see if they have enough capital to withstand a severe economic downturn. After it gave the go-ahead, many major banks announced significant increases to dividends and share repurchases.
"Right now, things are pretty good in lending" for the banks, said Kenneth Leon, research director, industry and equities, at CFRA Research. "That all bubbles up to having excess capital that can be a return of capital."
Citigroup doubled its dividend. JPMorgan Chase said it authorized share buybacks of up to $19.4 billion in the 12 months beginning July 1, its biggest repurchase program since the financial crisis. New regulations in the aftermath of the crisis made big banks like JPMorgan seek formal approval from the Fed to buy back shares and raise dividends.
JPMorgan's buyback plans topped Credit Suisse research analyst Susan Roth Katzke's expectations. In a Wednesday report, Katzke raised the price target on JPMorgan Chase to $102 from $99 a share.
The stock closed up 1.48 percent, to $91.15 on Thursday. The Financial Select Sector SPDR ETF (XLF) closed 0.65 percent higher, a fourth straight day of gains as one of two advancing sectors in the S&P 500.
Though they have languished this year, financial stocks are the best performers in the S&P 500 since the November election as traders bet the industry would benefit the most from the Trump administration's plans for tax reform and deregulation. Analysts also expect the Fed's plans to raise interest rates to be a boost to the banks' lending business.
Still, the financials ETF remains about 20 percent below the all-time highs hit a decade ago, just before the financial crisis reached its worst days in 2008.
"Our thesis is not as driven around 'interest rates going higher' as many financial bulls, but rather the very clear deregulatory environment we are in and entering," David Bahnsen, chief investment officer of The Bahnsen Group, said in an email. "We think as a sector there is certainly 15-25% more upside if all the stars align properly, and for many that will mean pre-crisis highs, and for many it won't."
The market-implied likelihood of default for the 34 financial firms fell by an average 12 percent after the Fed did not object to their capital return plans, according to an S&P Global Market Intelligence Credit Analytics model.
Even Capital One Financial, which received approval on condition it submit an updated plan by Dec. 28, saw a 15.7 percent decrease in likelihood of default, the model showed. JPMorgan Chase's probability of default fell 24.2 percent.
— CNBC's Liz Moyer contributed to this report.