Stress Tests: Big Banks Prefer Buybacks to Bigger Dividends

American Express (AXP) Stock Up on Investor-Friendly Moves

The Fed on Wednesday announced the results of the second round of its annual stress tests. Those allowed to raise dividends or repurchase shares include the four biggest US banks - JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC).

The Federal Reserve conditionally approved Capital One Financial Corp.'s capital plan in the regulator's annual "stress tests", saying the firm will have to resubmit its plan later this year to address shortcomings in its process.

This year was the first time all banks undergoing stress tests passed, although it was also the first time most were excluded from the "qualitative" component that Capital One failed.

Bank stocks jumped on the news.

Fed officials are considering making similar changes to the tests for the largest USA banks, including Goldman Sachs, Morgan Stanley and Citigroup.

As a result, the US' six biggest banks are set to return between $95 billion and $97 billion to shareholders across the next four quarters, RBC Capital Markets analyst Gerard Cassidy commented.

Nevertheless, Capital One was identified for weakness across its capital planning, which the Fed emphasized as needing addressing.

Fed Governor Jerome Powell, who is acting as regulatory lead for the US 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".

Fed Gov. Jerome Powell said in a statement the Fed's assessment of banks' capital plans in light of their reserves "has motivated all of the largest banks to achieve healthy capital levels, and most to substantially improve their capital planning processes". That metric fell to as low as 3.1 per cent at Goldman Sachs, just above the required minimum of three per cent. JPMorgan, Morgan Stanley and State Street Corp also reported ratios below 4 percent.

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.

Among banks given the Fed green light were also USA units of Deutsche Bank (DBKGn.DE), HSCB (HSBA.L) and Santander (SAN.MC), up between 0.6 and 4.7 percent. Financials have struggled for much of this year even after their postelection bounce last year, briefly falling into negative territory for 2017 and now the third-worst performer in the S&P 500. However, the Fed will not report the foreign bank results publicly this year.

American Express was forced to scale back its planned capital returns. 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.

The Fed's most extreme hypothetical scenario in this year's tests envisions the USA economy falling into a deep recession causing the stock market to plunge about 40 percent. Analysts expect financial firms will benefit the most from the Trump administration's proposed tax reform and deregulation, as well as the Fed's plans to raise interest rates.

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