The U.S. Federal Reserve will make big headlines this week—just not at tomorrow’s (March 13) meeting of its Open Market Committee. The Fed body that sets short-term interest rates is expected to leave rates just where they are at 0% to 0.25% and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.

In other words, business as usual Tuesday.

Thursday is a very different matter.

That’s the day when the Federal Reserve is scheduled to announce the results of its annual stress test on U.S. banks. The Fed is expected to give the go ahead for big dividend increases at banks that cut their dividends after the Lehman bankruptcy and that have been prohibited from raising dividends back to former levels since then by the Fed’s rulings that they hadn’t built up capital reserves to withstand another financial crisis.

Dividends at the 19 largest U.S. lenders will climb 30% in 2012 from 2011, according to Wall Street estimates. The biggest jumps, analysts project will occur at Wells Fargo (WFC) and Citigroup (C). Citigroup now pays a nominal one-cent a share quarterly dividend. Wells Fargo’s current quarterly dividend is 12 cents a share for a yield of 1.75%. Overall, estimates Barclays Capital, banks (excluding investment banks such as Goldman Sachs (GS) and Morgan

Stanley (MS)) will raise their payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index (BKX) is now just 1.8%, about half the 2007 level.

The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.

Bank of America (BAC) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn’t ask to raise its dividend or stock buyback in this round.

U.S. Bancorp (USB) continues to gain market share, from both acquisitions and internal growth. (The stock is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

The latest acquisition, announced on January 30, is the purchase of BankEast in deal coordinated by the Federal Deposit Insurance Corp. after the Tennessee bank was shut by regulators. It’s a small deal with U.S. Bancorp getting 10 branches in the Knoxville area, $272 million in assets, and $268 million in deposits, but the price was right (a $68 million discount to total assets) and the acquisition fills a hole in the bank’s Tennessee business.

The deal is of a piece with the bank’s strategy of using its post-Lehman relative strength to build its footprint at attractive prices.

You could also see that strength in the bank’s fourth quarter report of internal growth. Average loans in the quarter climbed by 5.9% year over year and 10% from the third quarter. Commercial loans grew by 16% year to year and residential mortgage loans were up 22% year to year.

For the quarter earnings came to 64 cents a share, excluding 5 cents a share in non-recurring items. That was a penny above the Wall Street consensus. Revenue climbed by 8.1% year to year. The bank finished the quarter with a Tier 1 common equity ratio of 8.2% under the Basel III guidelines. That’s well above the 7% minimum under the Basel III rules. Return on equity was better than 16%.

Not that U.S. Bancorp was exempt from all the problems facing the banking sector. Read more

Update Banco Santander (STD)

When do you demand that all your competitors report kitchen-sink quarters? When you’re convinced that their kitchen sinks are bigger than yours—and when you believe that some at least will go under from the effort of heaving them out the window.

The huge plunge in fourth-quarter earnings at Banco Santander (STD), Spain’s biggest bank, drew most of the attention yesterday, January 31, after the company reported its financial results. Net income fell for the quarter to 47 million euros from 2.1 billion euros for the fourth quarter of 2010. The results fell just a bit short of the consensus Wall Street estimate of 1.78 billion euros for the quarter. (Banco Santander is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ )

The quarter wasn’t nearly the complete shipwreck that those numbers suggest—if you just look at the results from Santander’s current operations. Read more

On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

Update Banco Santander (STD)

Shares of Banco Santander (SAN.SM) are down 3.9% in Madrid today and the U.S. ADRs (American Depositary Receipts) are down 3% (STD) in New York as of 1 p.m. Eastern Time on a big increase in shares outstanding as a result of the conversion of non-listed preferred shares into ordinary shares that count as core capital. The new shares started trading today and represent an increase in shares outstanding of about 3.8%. The conversion is part of Banco Santander’s efforts to raise capital to meet the regulatory requirements set down by the most recent stress test conducted by the European Banking Authority. The conversion increases the bank’s core capital to 10% under the old Basel II global banking rules, 8.9% under the new Basel III rules, and 8.7% under the European Banking Authority rules.

In its December 8 announcement of the results of its latest round of stress tests the European Banking Authority calculated that Banco Santander had a risk-adjusted core capital ratio of 6.77%. Since then Banco Santander has sold off parts of its Brazilian and Chilean operations, sold its entire Colombian subsidiary, and conducted a conversion of preferred to ordinary shares that have brought the bank to within striking distance of the European Bank Authority’s 9% core capital requirement.

To me, the numbers look like Banco Santander will be able to meet the rest of its capital needs—for the moment and pending write downs in its portfolio—from retained earnings.

The ADRs are a member of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and pay a trailing dividend yield of 11.5%. That yield is attractive, of course, only as long as the bank actually pays out the dividend. That’s not guaranteed but I think it’s more likely than not, especially since about 70% of investors have been willing in recent quarters to take their dividend in shares rather than in cash. The ADRs currently trade at $7.52. I think the ADRs will trade at $9 or better—at $9 that would be roughly a 20% gain from today’s price–once the bank has finished raising capital and has demonstrated that the dividend is secure in the next quarter or two. A longer-term target price would be $12 a share by December 2012.

I think the current ADR price seriously under-estimates the strengths of Banco Santander—and especially the ability of what is still the world’s 11^th largest bank by market capitalization to raise capital. Read more