Lots Of Winners In The Fed’s 2016 Stress Test, But Deutsche Bank, Santander Stumble Again

by Trefis Team
Deutsche Bank
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A week after giving the 33 largest bank holding companies (BHCs) in the country a pass grade in the first phase of its annual stress test for banks, the Federal Reserve published its much-awaited report detailing its consent and dissent to capital plans proposed by these banks last Wednesday, June 29. [1] The detailed results of the Fed’s annual Comprehensive Capital Analysis and Review (CCAR) for banks saw the financial regulator clearing the capital plans for 30 of these banking giants unconditionally, conditionally clearing Morgan Stanley’s (NYSE:MS) capital plan, and rejecting the plans put forward by Deutsche Bank (NYSE:DB) and Santander.

Notably, the Fed has rejected Santander’s capital plans as a part of the stress tests for the third consecutive year. As none of the 33 firms failed in the quantitative phase of the stress tests (see A Look At Results and Implications Of The Fed’s 2016 Stress Test For Banks), the Fed’s objection to the capital plans of these two firms was based on qualitative reasons. As for the other banks, the Fed’s acceptance of their capital plans for this year was followed by a string of press releases by these firms announcing dividend hikes, share buybacks or both late on Wednesday

See Full Analysis for: Bank of AmericaGoldman SachsJPMorgan ChaseMorgan StanleyHSBCDeutsche Bank

The banking sector has traditionally attracted investors looking for dividends. However, in the aftermath of the global economic downturn of 2008, the banks had to cut their dividends to shore up capital – which makes sense considering the number of banks that went under during that period. Along the way, the deteriorating debt situation in Europe forced a further delay in capital plans. It was only after the stress test in 2012 that the banking giants could finally begin paying back shareholders for their patience. And payout ratios for the largest U.S. banks is gradually returning to the high levels seen just before the downturn.

This year, the Fed found no problems with 30 of the 33 BHCs it tested. This indicates a sequential improvement in the capital strength of the country’s largest banking groups – something that reinforces the findings of the quantitative phase of the stress tests. In Morgan Stanley’s case, the Fed observed “material weaknesses in (the bank’s) capital planning process” – something that the bank will have to correct before resubmitting its capital plan by Dec 29 2016. [2] As for both Santander and Deutsche Bank, the Fed mentions that they “have material unresolved supervisory issues that critically undermine (their) capital planning process.” That said, the Fed acknowledges that both these Europe-based banks have fixed some of the issues they have pointed out over previous iterations of the stress tests.

So what do the results mean for the banks who saw their capital plans approved, and what about those whose plans were rejected? Banks that cleared the Fed’s regulatory hurdle are free to boost their dividends and to repurchase shares as long as the total amount is in line with what they submitted to the Fed. And nearly all the banks have detailed their intention to boost payouts in individual statements. As for the banks that failed the test, the Fed’s rules give them two options: they could either resubmit their capital plans to the Fed and seek a fresh approval, or they could continue with their current capital plan (i.e. the plan that was approved last year). As the tested U.S. subsidiaries of both Santander and Deutsche Bank never returned any capital to their respective parent firms over recent years, they are unlikely to submit a new capital plan later this year. They would, however, be expected to continue working on fixing the inadequacies in their capital planning process.

We will detail the proposed capital payout plan by individual banks in subsequent articles, while also explaining the impact of a dividend hike and/or share repurchase on their share price.

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  1. Federal Reserve releases results of Comprehensive Capital Analysis and Review (CCAR), Federal Reserve Website, Jun 29 2016 []
  2. Comprehensive Capital Analysis and Review 2016: Assessment Framework and Results, Federal Reserve Website, Jun 29 2016 []
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