Banks can buy shares again. Wall Street is happy.

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Bankers have reason to take out champagne before New Year’s Eve.

Shares in the sector rose on an otherwise low day for Wall Street, while investors applauded the Federal Reserve’s move to allow the country’s largest banks to resume share buybacks, subject to limitations.

SPDR S&P Bank ETF

(ticker: KBE) rose 0.7% on Monday, while shares of

JPMorgan Chase

(JPM) and

Bank of America

(BAC) gained 3.8% and 3.7%, respectively.

Shortly after the Fed announced Friday, JPMorgan announced plans to buy back $ 30 billion worth of shares in 2021. Morgan Stanley also announced plans to buy up to $ 10 billion worth of shares.

Few on Wall Street expected the central bank to allow the redemption so soon. With the increase in the number of coronavirus cases across the country and the spectrum of continuous shutdowns, much uncertainty remains about the path to economic recovery. But after facing the second stress test of the year, banks have been able to show that they are equipped to deal with an even worse economic recession than many economists have predicted. In developing stress test scenarios earlier this year, the Fed noted that they were “significantly more severe than most current benchmarks for the US economy.”

For banks, the Fed’s decision provided much-needed good news for the sector. While stocks in other industries recovered from March lows, banks lagged behind, with investors worried about the impact of low interest rates and anticipated loan losses.

Analysts expect the redemptions to be an asset for shares when they officially resume in the first quarter of next year. The repurchase of shares could reach 10% of the bank market capitalizations next year, according to Gerard Cassidy, CEO of RBC Capital Markets.

Banks are somewhat restricted in terms of return on capital to shareholders. The combination of redemptions and dividends is capped at the average earnings of the last four quarters. As earnings were successful in early 2020, as banks accumulated reserves for loan losses, the return on capital will be lower in the first half of the year.

“As the year progresses, however, we expect redemption amounts to increase as depressed results in 1Q20 and 2Q20 are excluded from average net income in the last four quarters from 2Q21,” Cassidy wrote.

Given that banks will benefit from the resumption of redemptions, analysts are trying to guess who the winners and losers will be.

“We see a substantial ability to buy back shares, with

Bank of New York Mellon

(BK)

Morgan Stanley (MS)

and

State Street

(STT) having the highest capacity (as% of market capitalization) in 1Q21 and

PNC financial services

(PNC)

Fargo fountains

(WFC) and

American Express

(AXP) at least, ”Richard Ramsden, an analyst at Goldman Sachs, wrote on Monday.

Analysts at Keefe Bruyette & Woods differed slightly in assessing how the redemptions will affect banking actions. Expect Wells Fargo, and State Street

City Group

(C), will have the most shares to be repurchased over a period of two years based on market capitalization. Based on average daily trading volumes, State Street, Bank of New York Mellon, Morgan Stanley and

Northern Trust

would have the most redemption shares.

Write to Carleton English at [email protected]