This Analyst Thinks Goldman Sachs & Morgan Stanley Cap Returns Are At Risk

At least two large-cap banks are at risk of getting restrictions slapped on their buybacks and dividends next week, an analyst said Friday.

Goldman Sachs Group Inc. GS and Morgan Stanley MS squeaked by with passing results of the Federal Reserve's Stress Test released Thursday.

"But the narrow buffer over minimum capital requirements increases the risk that share repurchases will come in below our expectations," Keefe, Bruyette & Wood's Brian Kleinhanzl said in a research note.

"They all passed, although some not with flying colors," Kleinhanzl said of the annual test imposed on 31 of the nation's largest banks by the Dodd Frank Act.

Results of a related test, called the comprehensive capital analysis and review, are expected Wednesday and may come with restrictions on capital returns to shareholders for certain banks.

Related Link: The 10 Best Fed Stress Test Scores

At Goldman, a key capital ratio estimated for a "severely adverse scenario" under the recent stress test was only 0.1 percent above the minimum, while Morgan's was just 0.5 percent higher than required, according to Kleinhanzl.

Goldman is unlikely to announce buyback plans when the capital review is disclosed next week, but removing them, Kleinhanzl said, would shave about 2.5 percent from 2015 earnings, currently at $16.95 a share.

Citigroup Inc's C ratio was also minimal, but Kleinhanzl said the bank is expected to boost capital by issuing preferred shares that will "add to its buffer."

Zions Bancorp ZION squeaked by 0.1 percent above the minimum ratio, "but we view this as a positive" given the bank's flunking grade a year ago, Keefe's Brian Klock said.

Moreover, Zions isn't expected to return any capital to shareholders in 2015, Klock added.

Four other banks followed by Keefe, Bruyette & Woods had better stress test outcomes and buybacks aren't at risk according to Keefe analysts.

Those banks include Northern Trust Corp. NTRS, Comerica Inc. CMA, Citizens Financial Group Inc. CFG and M&T Bank Corp. MTB.