The Federal Reserve approved 25 of 30 banks’ capital plans after a second round of stress tests including the impact of requested capital actions.
Of the 30 banks tested by the Fed, only Zions did not meet the minimum 5% Tier 1 common capital ratio target in the severely adverse scenario. Results generally in-line with expectations should support banks’ announcements of payout increases following the announcement of test results including capital plans.
Most listed U.S. banks subject to the Federal Reserve’s Comprehensive Capital and Analysis Review raised shareholder payouts after passing stress tests incorporating increases. Dividends and buybacks are a core portion of expected returns for bank shareholders, and the largest banks’ ability to potentially meet Basel III hurdles years early, along with consensus-expected profit growth, may allow for greater capital returns.
The Federal Reserve objected to capital plans from the U.S. units of three overseas banks, HSBC, RBS and Santander, which were all new to the Federal Reserve’s Comprehensive Capital and Analysis Review this year. While each exceeded the 5% stress test minimum, the Fed cited “sufficiently material” deficiencies in capital-planning processes. All three are barred from implementing capital plans and must resubmit proposals after addressing the issues leading to the objections.
Citigroup’s plans for an increase in its quarterly dividend to 5 cents per share and a $6.4 billion buyback were objected to by the Fed on qualitative grounds. Bank of America announced a 5 cent dividend, in line with expectations, and a $4 billion buyback, which is less than last year’s $5 billion. Its plan won approval only after reductions. Both banks have trailed peers’ dividend raises in recent years and were conservative in 2013 total requests after previous denials.
Goldman Sachs and Morgan Stanley both passed tougher Fed stress scenarios, incorporating counterparty defaults in addition to a global market shock. Goldman revised its capital plan to gain approval. It didn’t announce the details, in keeping with previous years. Morgan Stanley, having digested the Smith Barney brokerage acquisition, doubled its quarterly dividend to 10 cents per share, above the consensus 8 cents estimate. It also announced a $1 billion buyback.
The BBSTI Index, comprised of banks facing the 2014 Comprehensive Capital Analysis and Review, has appreciated 2.5% through mid-March, outperforming broader U.S. financials (0.5%) and world financials (down 0.1%). Bank of America (10.2%), Regions (7.9%) and PNC Financial (6.7%) lead performance among these peers, and have relatively higher capital return expectations.
PNC’s stock has been one of the best performing among peers ytd, returning 9.7% vs. 4.4% for large and super-regional banks. After digesting its acquisition of RBC’s U.S. retail business, PNC’s 9.4% capital ratio is well above its target and up 190 bps yoy. PNC plans to use excess capital to increase shareholder payouts pending Federal Reserve approval, helping raise its ratio from 18% in 2013, closer to the capital review banks’ median of 43%.
U.S. Bancorp has the highest ROE among U.S. regional and diversified bank peers and an 8.8% estimated 4Q Basel III Tier 1 common ratio, key indicators for capital return. Management retains its 60% to 80% capital return goal, and said it was about at the midpoint of that range in 2013. Its ratio is a bit lower using net share repurchases. Current and projected ROEs are above peers such as JPMorgan and Citigroup.
Citigroup earns more than 50% of revenue outside the U.S., with likely more than 40% from emerging markets. Goldman Sachs (42%) and Bank of New York (37%) follow, though the latter’s business may be less cyclical. Harsher developing Asia assumptions include a 2.8% GDP contraction trough vs. 0.3% growth in 2013′s stress test, while Japan contracts 10.8% vs. 6.8%. Euro zone assumptions are similar, though the U.K.’s 3.6% contraction is more benign than 6.6% prior.
Wells Fargo has the highest residential exposure of public peers (42%). HSBC’s subsidiary (52%) and Mitsubishi UFJ’s UnionBancal (42%) also have large concentrations. A 25% drop in home prices is tested vs. 21% in the 2013 test, though trough prices are 4% higher with a healthier start. Wells Fargo is expected to withstand this stress, with a total payout that may rise 80%, according to a Bloomberg News survey.