Banks Add $40 Billion In Value After Fed Stress Tests

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.