Big banks: Capital deployment winners and losers
The Fed surprised some observers by rejecting BB&T's capital plan, likely because of an excessive dividend payout.
By Philip van Doorn
The Federal Reserve has finally completed its 2013 stress test process, except for a few banks that will have to submit revised capital plans by the end of the third quarter.
The big surprise late on Thursday was the Federal Reserve's rejection (see TheStreet) of BB&T's (BBT) capital plan. BB&T of Winston-Salem, N.C., is in strong shape and weathered the financial crisis quite well, considering its geographical footprint. The Fed said that BB&T's plan was rejected based on "a qualitative assessment conducted by the Federal Reserve." BB&T's shares were down almost 3% in trading Friday, to $30.97.
Guggenheim Securities analyst says that "we believe BBT was penalized for requesting a dividend payout in excess of 30% of earnings. The Fed had warned banks that any requests that exceeded 30% of earnings on dividends or 100% of earnings in total capital distributions would receive increased scrutiny and they backed up this warning by making BBT this year's example."
"This was a surprise, since BBT passed the quantitative part of CCAR with a 7.8% post stress loss capital ratio and had sailed through previous reviews," Mosby says, adding that "BBT is not approved to execute any incremental capital distributions, including merger & acquisition requests," until its revised capital plan is approved.
The first part of the stress tests was the Dodd-Frank Act Stress Test (DFAST) for 18 large financial holding companies. These tests gauged big banks' ability to withstand a "severely adverse scenario," while remaining well-capitalized with minimum Tier 1 common equity ratios of 5.0% through the end of 2014. The severely adverse scenario included an increase in the U.S. unemployment rate to over 12% in the second half of 2013, with a 50% drop in equity prices and a 20% decline in real estate prices. DFAST was completed on March 7, with only Ally Financial failing to remain well-capitalized under the Fed's projections.
For the 18 largest stress-tested banks, the second part of the process was the Comprehensive Capital Analysis and Review (CCAR), completed late on Thursday. CCAR applied the same recession scenario to the banks' submitted plans to deploy excess capital through dividend increases, share buybacks or acquisitions. When announcing the CCAR results, the Fed also rejected Ally Financial's capital plan "both on quantitative and qualitative" grounds. Both BB&T and Ally need to submit revised capital plans by the end of the third quarter.
Other large banks with total assets of over $50 billion were subjected to a similar set of stress tests, called the Capital Plan Review (CapPR), which included the banks' capital plans. The Fed didn't publicly announce the results of these tests, but the tested banks began announcing the results of the tests, along with plans to deploy excess capital.
These banks announced plans to deploy excess capital, beginning in the second quarter through the first quarter of 2014, in excess of many analysts' forecasts:
Bank of America (BAC) said late Thursday it would keep its quarterly dividend at a nominal 1 cent a share, but would also repurchase up to $5.0 billion in common shares, while redeeming roughly $5.5 billion in preferred shares. Atlantic Equities analyst Richard Staite in a report Friday said Bank of America's buyback plans are "much larger than the consensus forecast of $1.9bn and should more than offset any disappointment that the dividend was held flat at $0.01 (consensus expected $0.03)." Bank of America's shares were up over 3% in afternoon trading.
Regions Financial of Birmingham, Ala., announced it would increase its quarterly dividend to $0.03 a share from 1 cent, with buybacks totaling up to $350 million. The company said its approved capital plan also allows it to repurchase up to $500 million in trust preferred securities. The excess capital deployment follows the company's 2012 transformation, which included the sale of its Morgan Keegan brokerage unit, a common equity raise and repayment of government bailout funds. Shares of Regions were up 0.5% in early trading, to $8.35.
KBW analyst Christopher Mutascio in a report late on Thursday said "dividend requests from RF and BAC were conservative in nature, while buybacks came in ahead of expectations. We believe market perception will be positive, as the announcements validate the progress both institutions have made on the capital front."
Capital One (COF) announced a large increase in its quarterly dividend, to 30 cents a share from 5 cents, although the company announced no share buybacks. FBR analyst Paul Miller in a report on Friday said "The Fed's approval of Capital One's capital plan signals confidence in COF's prospects and increasing likelihood for material share repurchases in 2014. We continue to view COF shares as attractive given the company's high return on equity and increasing ability to return additional capital into 2014." Capital One's shares were up over 1% in afternoon trading, to $55.17.
State Street (STT) of Boston announced an increase in its quarterly dividend to 26 cents a share from 24 cents, and up to $2.1 billion in share buybacks. KBW analyst Robert Lee estimates the company's 2013 capital deployment will be "86% of capital generation net of share issuance." The analyst in a report late on Thursday that "STT may begin to draw down excess capital is a positive factor in helping to improve [its return on equity] going forward." State Street's shares were down slightly in afternoon trading, to $59.76.
Wells Fargo (WFC) raised its quarterly dividend to 30 cents a share from 25 cents and said it had received Federal Reserve approval for "a proposed increase in common stock repurchase activity for 2013 compared with 2012," when the company's share repurchases totaled $4.0 billion. Mutascio was "surprised" at the dividend increase, since the bank had raised the dividend by 3 cents in January. "As a result, the company's dividend yield of 3.2% will be the highest in our large-cap coverage universe," he wrote. Wells Fargo's shares were up almost 3% in afternoon trading, to $37.99.
While the two banks aren't really "losers," in that their capital plans were not rejected outright by the Federal Reserve, JP Morgan Chase (JPM) and Goldman Sachs (GS) both received "conditional" approvals of their capital plans by the Federal Reserve. That can be perceived as a negative for both companies, but especially for JPMorgan Chase, which is feeling the heat from the Senate Committee on Investigations, led by Senator Carl Levin (D., Mich.), which is holding a hearing Friday on the company's "London Whale" hedge trading losses first announced last May.
Despite having to resubmit its capital plan, JP Morgan announced an increase in its quarterly dividend to 38 cents a share from 30 cents, and said it would repurchase up to $6.0 billion in shares through the first quarter of 2014. JPMorgan's shares were down over 2% in afternoon trading, to $49.86.
Goldman Sachs CEO Lloyd Blankfein said in a statement the firm was "pleased to continue to have the flexibility to return capital to shareholders," but the company released no further details on its capital plan. Goldman's shares up slightly in afternoon trading, to $154.79.
While Ally Financial and BB&T had their capital plans rejected outright, the Fed partially objected to the capital plan submitted by Zions Bancorporation (ZION) of Salt Lake City. The company announced that the regulator "to certain proposed capital actions, it did not object to key capital actions relating to the reduction of the cost and quantity of Zions' non-common capital." The company was approved to repurchase $600 million in preferred and trust preferred securities and said it could request permission to redeem another $200 million in preferred stock in its revised capital plan.
Jefferies analyst Ken Usdin said in a report late on Thursday that "ZION's quarterly dividend appears to stay at $0.01." Shares of Zions Bancorporation were down over 1% in afternoon trading, to $25.39.
SunTrust (STI) of Atlanta said it would increase its dividend to 26 cents a share from 24 cents and buy back up to $2.1 billion in common shares. The dividend increase "came in below our estimate of an $0.08 dividend increase (to $0.13), while buybacks of $150 million were below our estimate of $274 million," Mutascio wrote, adding that "as a result, the overall payout of 25.8% came in below our estimate of 38.3%." SunTrust's shares were down 2% in afternoon trading, to $28.97.
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The TBTF banks should've been nationalized and each depositor and taxpayer given shares of stock that we held in escrow until an IPO was held after they were healthy again. It's totally
disgusting that depositors are given 0% interest on their deposits while banks get unlimited
loans from the Fed a 0.25% and if you try to get a loan the banks want you to pay 3-5% while
paying you nothing for your deposits.
Commercial banks should not be allowed to have investment bank divisions and vice versa. Glass
Stiegel worked and should've be reinstated in total. We're being scammed by a banking ponzi game
just like we were scammed by a real estate ponzi game. Next, let's talk about truth in investing
and how GS and others misinform the public about investing opportunities while their trading
desks are doing the opposite.
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