Wednesday, March 14, 2012

Banks Raise Dividends After Passing Stress Tests

The Federal Reserve released the stress test results for the 19 largest U.S. banks. From the Fed's press release:

The Federal Reserve on Tuesday announced summary results of the latest round of bank stress tests, which show that the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical economic scenario.

The Federal Reserve in the Comprehensive Capital Analysis and Review (CCAR) evaluates the capital planning processes and capital adequacy of the largest bank holding companies. This exercise includes a supervisory stress test to evaluate whether firms would have sufficient capital in times of severe economic and financial stress to continue to lend to households and businesses.

The nine quarter hypothetical stress scenario assumes the following:

- 13 percent peak unemployment rate

- 50 percent drop in equity prices

- 21 percent decline in housing

- 8% drop in GDP

According to the Fed 4 banks failed the test. Citigroup (C), Ally Financial, and SunTrust (STI) failed to have an adequate tier 1 common capital ratio. MetLife (MET) failed on the basis of its risk-based capital ratio being too low.

The problem for some came down to proposed plans to return capital being too aggressive. From yesterday's SunTrust press release:

The Federal Reserve review showed that SunTrust's capital exceeded requirements throughout the Supervisory Stress Test time horizon without any capital actions. As a result of this review, SunTrust will not be increasing its return of capital to shareholders at this time...

Citigroup would have met the minimum capital requirements if a more modest plan to return capital to shareholders had been submitted. The bank has already announced it will submit a new capital plan to regulators (no doubt some of the others will need to do the same). From yesterday's Citigroup press release:

...results showed that Citi exceeded the stress test requirements without the capital actions Citi proposed. However, the Federal Reserve advised Citi that it objected to Citi's proposed return of capital to shareholders. In light of the Federal Reserve's actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations.

Soon after the stress test results were released (and in the case of JP Morgan before the results were released), some of the healthier banks announced the dividend increases and other capital actions. All these actions had to have been, of course, accepted by the Fed:

JPMorgan (JPM) - Raised its dividend 20% from 25 cents/share to 30 cents/share and announced a $ 15 billion stock buyback.
U.S. Bancorp (USB) -  Raised its dividend 56% from 12.5 cents/share to 19.5 cents/share and plans to repurchase up to 100 million shares of stock.
Wells Fargo (WFC) - Raised its quarterly dividend 83% from 12 cents/share to 22 cents/share, an 83% increase. The banks also mentions "other capital actions" in its press release but wasn't more specific.
American Express (AXP) - Raised its quarterly dividend 11% from 18 cents/share to 20 cents/share and said it intends to buy back up to $ 4 billion of stock in 2012 and up to $ 1 billion of stock in 1Q 2013.
BB&T (BBT) - Raised its quarterly dividend 25% from 16 cents/share to 20 cents/share.
State Street (STT) - Raised its quarterly dividend 33% from 18 cents/share to 24 cents/share and a share repurchase program of up to $ 1.8 billion.

PNC (PNC) said the Federal Reserve accepted its capital plan but won't be announcing any specifics until their next board meeting.

Unfortunately, some of the above stocks are rallying this morning. If that continues some of these announced buyback plans will become less wealth enhancing for long-term shareholders.

Adam

Long JPM, USB, WFC, and AXP

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