All 34 large banks pass capital tests, prepare big dividend boosts

Receiving Wide Coverage ...
Happy days: The Federal Reserve approved the capital plans for all 34 large American banks taking part in its annual stress tests. “The approvals — the first time since the annual tests began in 2011 that all firms got passing grades — reflect a turning point for big financial institutions that have been shackled by tighter regulation since the financial crisis,” the Wall Street Journal comments. “They could also herald a return to pre-crisis days when banks were reliable dividend payers and shareholders flocked to them.”

Indeed, many of the banks immediately announced plans to increase their dividends and share buybacks. On average, the banks requested payouts close to 100% of their expected earnings over the next year. “That means banks in some cases will be able to start whittling away at capital buffers that many bank executives say are well in excess of what is needed to absorb potential losses,” the Journal says. Wall Street Journal here and here, Financial Times, New York Times, American Banker here and here

The six largest banks — Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Wells Fargo — are expected to pay out nearly $100 billion to their shareholders over the next four quarters.

Citigroup is planning to pay out more than it is expected to earn over that period “as the bank seeks to revive its lagging stock.” The bank plans to pay out nearly $19 billion over the next four quarters, which would equal more than 130% of the income it is expected to generate.

Investors hoped a Trump presidency would allow banks to offer such dividend, the Times says. "While the administration has no direct role in the stress test, this year is the first that a Republican Fed governor, Jerome H. Powell, has overseen the process," the paper notes. And, the paper says, Powell professed a desire "to phase out the qualitative aspect of the test for certain banks."

David Paul Morris/Bloomberg

The Journal and the Financial Times provide an update on the dividend and buyback actions announced by the biggest banks.

But there was one sour note in an otherwise euphoric day. Capital One received a “conditional non-objection” to its plan after the Fed said the bank “exhibited material weaknesses in its capital planning practices.” The bank has until the end of the year to resubmit its plan; if that fails to pass muster, the Fed may restrict its capital distributions.

While most bank investors were no doubt jubilant about all this generosity, Rana Foroohar, the FT’s global business columnist and associate editor, was a lot more circumspect. “While investors in banking stocks might be happy to see institutions increasing leverage by buying back shares, it may be exactly the wrong time for them to be doing so,” she warns. “We’re at the tail-end of a recovery cycle, and debt loads in the wider economy are high. Better for banks — and investors — to prepare for a rainy day.”

Better value?: While the big U.S. banks were planning how to give their money to shareholders, American International Group’s new CEO Brian Duperreault is looking to instead use the company’s capital for growth and acquisitions. “Let’s use the capital intelligently,” he said at the insurance giant’s annual meeting Wednesday. “The likelihood we can continue the pace of share buybacks is low because I think there are other things I can use the money for.” Wall Street Journal, Financial Times

Wall Street Journal
Bright future: MetLife said it is close to spinning off its one-time core retail life insurance business after Delaware state insurance regulators approved the planned divestiture. The new company will be called Brighthouse Financial and have about $223 billion in total assets. The plan still requires final approval by the Securities and Exchange Commission.

Quotable
“Shareholders want to see value creation. If I can present them something that is better value creation than a share buyback, I won’t get a hard time.” — AIG CEO Brian Duperreault.