The biggest U.S. banks added more
than $40 billion in market value after the Federal Reserve’s annual stress
tests opened the way to surprisingly big increases in dividends and share
buybacks.
Wells Fargo & Co. jumped 4.1
percent while Citigroup Inc. surged as much as 3.8 percent in New York trading
Thursday. Regions Financial Corp. and KeyCorp also climbed as the KBW Bank
Index rose the most since April.
“The results came in well ahead
of both our estimates and consensus estimates as the Fed allowed for a large
step-up” in payouts to shareholders, Scott Valentin, an analyst at Compass
Point Research & Trading LLC, said in a note titled “Fed Unlocks Treasure
Chest of Capital Return.”
JPMorgan Chase & Co.,
Citigroup and Bank of America Corp. unveiled plans on Wednesday
to boost payouts more than analysts had projected, after every lender passed
the Fed tests for the first time since the central bank began the reviews in
the wake of the 2008 financial crisis.
Capital One Financial Corp. slipped
0.7 percent after it was the lone bank to stumble through the exam, garnering
conditional approval to make payouts while it fixes “material weaknesses” in
planning. The company reduced its buyback program for the next four quarters 30
percent compared to the previous year’s total.
Lofty payouts made banks hot
stocks until the financial crisis exposed many of them as too thinly
capitalized. The companies unveiled plans Wednesday showing how they’re trying
to generate investor interest -- even as many still struggle to meet profitability
targets and a few languish below book value.
“The sun is setting on the
post-crisis balance sheet rehab,” Pri de Silva, an analyst at CreditSights
Inc., said in a note. “These massive payouts and an improved earnings outlook
reflecting higher rates should alleviate calls for breaking up the banks.”
The Fed’s projections also show
regulators may have more leeway to ease rules after years of forcing companies
to curtail risk-taking and beef up internal controls -- demands that eroded
revenue and fueled cost increases.
The industry is counting on
President Donald Trump to soften that oversight by appointing more
business-friendly board members to the Fed, shifting the balance of power from
regulators to shareholders. This month, Treasury Secretary Steven Mnuchin
recommended that stress tests be performed every other year and that banks
maintaining a sufficiently high level of capital be exempt from exams.
JPMorgan, the nation’s largest
lender, said it’s boosting its quarterly dividend 12 percent and may increase
share repurchases to $19.4 billion over the next 12 months -- roughly 90
percent more than in the prior year. Citigroup plans to double its dividend and
may purchase up to $15.6 billion. Bank of America hiked its dividend 60 percent
and will buy back up to $12 billion.
Those three banks along
with Wells Fargo and Morgan Stanley may collectively buy as
much as $64 billion in stock. Goldman Sachs Group Inc. doesn’t
typically make a payout announcement immediately following the tests.
Generally, banks are expected to
distribute close to 100 percent of their earnings over the next four quarters,
substantially more than a year earlier, according to a senior Fed official. On
average, analysts had estimated that the 34 firms in this year’s tests
would pay out about 86 percent, according to figures compiled by Bloomberg.
Capital One’s stumble was a
surprise. Some analysts had opined that Wells Fargo might not pass after a
retail account scandal exposed control lapses. And Morgan Stanley, which last
year had to resubmit a plan for managing capital, trailed the rest of Wall
Street on one of the main metrics during an initial round of testing last week.
Firms focusing on credit cards
struggled most. The Fed said last week that the “recent uptick in delinquency
rates in credit card portfolios” was among stress points for banks in the
tests.
Capital One and American
Express Co. were the only companies this year to revise their capital
plans after the exams’ first round. AmEx’s total risk-based capital was
projected to fall below the required 8 percent minimum in the plan it
originally submitted.
Capital One is “fully committed
to addressing the Federal Reserve’s concerns with our capital planning process
in a timely manner,” Chief Executive Officer Richard Fairbank said in a
statement. The company plans to update or affirm its guidance for full-year
profits when it announces second-quarter earnings next month.
The annual review is a
cornerstone of the Fed’s strategy to prevent a repeat of the financial crisis
and taxpayer-funded bailouts. In an initial round last week, firms showed they
have enough capital to handle hypothetical turmoil, such as surging
unemployment, a sharp drop in housing prices or an extended stock slump.
Wednesday’s results marked this year’s final round, determining whether they
can proceed with payouts.
This time, authorities dropped
one of the toughest components of the tests, the so-called qualitative review,
for all but the biggest banks.
Deutsche Bank AG’s New York-based
trust bank and Banco Santander SA’s U.S. business, which had both failed two
years in a row on qualitative standards, passed after being exempted from that
review.
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