US Banks pass annual Fed stress tests

Federal Reserve Governor Jerome Powell
Federal Reserve Governor Jerome Powell Reuters

30 June, 2017

Citigroup Inc (C.N) won a particularly notable victory, gaining permission to return almost US$19 billion to shareholders, or about 125 per cent of projected earnings over the next four quarters - a big bump from past year, and more than analysts had expected.

The Fed said on Wednesday that all of the 34 banks had passed the second, tougher part of its annual stress test, showing that many have not only built up adequate capital buffers, but improved risk management procedures as well.

The verdict is part of the Fed's yearly financial health checkup on banks like JPMorgan Chase, Bank of America and Wells Fargo to determine if they are strong enough to weather a severe financial crisis while still being able to continue to lend to consumers and businesses. They are: Ally Financial, American Express, BancWest, Bank of America, Bank of New York Mellon, BB&T, BBVA Compass, BMO Financial, Capital One, Citigroup, Citizens Financial, Comerica, Deutsche Bank, Discover, Fifth Third, Goldman Sachs, HSBC, Huntington Bancshares, JPMorgan, KeyCorp, M&T, Morgan Stanley, MUFG Americas Holdings, Northern Trust, PNC, Regions Financial, Santander Holdings, State Street, SunTrust, TD Group, U.S. Bancorp, Wells Fargo and Zions Bancorp.

The Fed found that US firms' common equity capital ratio has more than double, rising to 12.5 percent at the end of Q1 2017 from 5.5 percent in Q1 2009, a total increase of $750 billion to $1.25 trillion.

The timing and amount of common shares purchased under the Company's authorized capital plans will depend on various factors, including the Company's business plans, financial performance and market conditions.

Fed Governor Jerome Powell, who is acting as regulatory lead for the USA central bank, said the process "has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes".

That in turn hurt sectors such as utilities, which suffer as growing expectations of rate hikes make their constant dividend flows less attractive.

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On June 28th the Fed said it had approved the dividend and buy-back plans of all 34 banks tested this year-plans which propose handing shareholders a pile of cash. As of the latest earnings report the EPS was $0.86 and is estimated to be $1.33 for the current year with 1,096,107,000 shares now outstanding.

It will now be up to individual banks to disclose their plans to distribute capital - either by buying back shares or distributing dividends - to shareholders.

That led City analysts to forecast massive windfalls to bank shareholders in the form of buybacks and higher dividends in the next two years.

An increase in the quarterly common share dividend from $0.095 per share up to $0.105 per share. The CCAR results follow the Federal Reserve's June 22, 2017 publication of its Dodd-Frank Act Stress Test results. The ex-dividend date was Thursday the 25th of May 2017. The firm's plan also includes an up to $11.5 billion of common stock repurchases, compared to $8.3 billion in share repurchases in the four quarters ended in the first quarter of 2017.

US stock index futures were little changed on Thursday, a day after the benchmark S&P 500 index scored its biggest one-day percentage gain in about two months, as investors awaited GDP and jobs data.

The Fed governor's suggestion comes amid more than 100 recommendations made by the Treasury Department to lessen the burden on banks, including limiting the number of financial firms that must face the annual exams.

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