How Did The Largest U.S. Banks Fare In Terms Of Meeting Core Capital Ratio Targets At The End Of Q2 2016?

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Morgan Stanley

At the end of Q2 2016, each of the six largest U.S. banking giants reported common equity tier 1 (CET1) ratio figures in excess of the target figure they need to achieve by 2019. Notably, Morgan Stanley’s CET1 figure was 570 basis points (5.7% points) above the required level, while the gap is only 50 basis points (0.5% points) for Bank of America and JPMorgan.

CET1_QA_US_16Q2

The CET1 ratio is a key quantitative measure used by the Fed to approve or reject a bank’s capital plans each year as a part of its Comprehensive Capital Analysis and Review (CCAR) – commonly known as the bank stress tests. A larger difference between the current and target CET1 ratios gives a bank more leeway in handing out cash to investors in the form of share repurchases and dividend hikes. Morgan Stanley’s comfortable margin allowed the bank to announce plans to hike dividends by 33% and also initiate a $3.5 billion share repurchase program in late June. It was not all smooth sailing for Morgan Stanley in this year’s stress test, though, as the Fed only granted a conditional approval to the bank in view of some shortcomings in its capital planning process.

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We represent dividend payouts and share repurchases in our analysis of Morgan Stanley in the form of an adjusted dividend payout rate, as shown in the chart below. Note that we represent this payout rate as 0% in the chart for 2008, 2009 and 2012 as the figure was not meaningful. You can understand how a change in Morgan Stanley’s adjusted payout ratio affects its share value by making changes here.

Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment/ ask questions on the comment section
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for U.S. Bancorp | Wells Fargo | Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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