Banks will double their capital return after successful stress test, No. 1 analyst Mayo says

Published Fri, Jun 25 20212:58 PM EDTUpdated Fri, Jun 25 20213:11 PM EDT

The Federal Reserve just gave the banking industry the green light to start giving more cash back to investors and the firms won't hesitate, doubling their capital return in the form of dividends and buybacks this year, according to Wells Fargo Securities. Large-cap banks will raise their capital return to $135 billion in 2021 from $63 billion in 2020, said senior equity analyst Mike Mayo. Mayo is the top Wall Street analyst covering large-cap banks, according to Institutional Investor. The Federal Reserve announced Thursday that the biggest U.S. banks could easily survive a severe recession. The Fed, in releasing the results of its annual stress test, said all 23 institutions in the 2021 exam remained "well above" minimum required capital levels during a hypothetical downturn. Banks have money to give back after strong capital markets and better-than-expected consumer credit during the pandemic. Now, the successful stress test creates flexibility for banks to return capital without special regulatory approval that has been in place since the Global Financial Crisis and during the pandemic, Wells Fargo noted. "This is yet one more step toward banks gaining normality not only since the pandemic but also since the GFC," said Mayo. "Without any new roadblock, banks can now look to return some of their est. $200B of excess capital." Mayo said he expected a "flurry of press releases" on Monday from banks announcing dividend increases and buybacks. The firm expects buybacks to increase to $95 billion in 2021 from $23 billion in 2020. Mayo estimates dividends per share will increase roughly 18% over the next six quarters. Wells Fargo said this sets banks up for a rally, with better capital return followed by improved loan growth in a few quarters. "That's value that can attract the attention of a larger pool of investors, such as income-oriented funds and quants," Mayo added. Mayo's top picks In terms of excess capital, Mayo said Bank of America and JPMorgan have the most with $40 billion and $34 billion, respectively. Wells Fargo Securities has an overweight rating on both equities. "Bank of America is a unique beneficiary from the COVID recovery as it relates to credit, rates, capital return, and reputation as a leader in stakeholder capitalism," said Mayo in a recent note. "BAC is a leader in tech among banks, which should help it further grow its leading deposit share toward." "Overall, BAC is a goliath at a time when goliath is winning," Mayo added. Wells Fargo Securities also said regional bank PNC Financial is a top pick. The firm has increased earnings estimates for PNC four times in the last four months, due to better-than-expected benefits from the BBVA acquisition. "PNC also said that its capital is better than expected and that it intends to resume share buybacks, which it said may help support its stock price," said Mayo in a recent PNC note. Wells Fargo Securities also has overweight ratings on Citigroup , Goldman Sachs and UBS . — with reporting from CNBC's Michael Bloom.

A Bank of America branch in San Francisco on Jan. 14, 2021.

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