The Federal Reserve's stress tests of major Wall Street firms last week didn't determine how much they can increase dividends and stock buybacks over the next 12 months. But they did produce some good omens for a review due today that does.

All of the institutions met the central bank's minimum capital standards on the first stage of the two-part evaluation, which measured their stability after the past year's payouts if the economy suffered a downturn with unemployment of 10% and a stock-market decline of 50%.

The results indicate the Fed is more likely to approve the firms' dividend and stock-buyback plans during the second stage -- a forward-looking review that measures what their strength would be after the expenses, using the same recession scenario. On a net basis, the payout ratio may rise to 85% of net earnings from 73% last year for the large banks tracked by Credit Suisse, analyst Susan Roth Katzke said in a note to clients.

Since the Fed reiterated that it would still scrutinize dividend ratios higher than 30% more closely, the mix of announced payouts is likely to favor stock buybacks at the biggest banks, which are still subject to a qualitative review that includes the strength of risk-planning practices, Katzke said.

Eoin Treacy's view

The banking sector has had to hold a great deal of capital in reserve to meet increased regulatory demands resulting from tighter regulation in the aftermath of the financial crisis as well as the need to rebuild their balance sheets over the same timeframe. The evolution of policy which recognises the strides made by the sector in rebuilding are likely to be beneficial to investors seeking potential for dividend growth or increased buybacks. 

The S&P500 Banks Index has been largely rangebound since the post-election surge but that relatively inert six-month period has unwound the overextension relative to the trend mean. It firmed from the region of the 200-day MA three weeks ago and a sustained move below 275 would be required to question medium-term scope for additional upside. 

The KBW Regional Banks Index is also firming from the region of the trend mean and the psychological 100 level.