Fed Clears Capital Plans Of All U.S. Banks Subject To Stress Tests For First Time In Seven Years

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The Federal Reserve cleared the capital return plans of all 34 bank holding companies (BHCs) that were a part of this year’s stress test for banks – making this the first time since the regulator implemented the annual Comprehensive Capital Analysis and Review (CCAR) process in 2011 that all participating financial institutions successfully received the mandatory approval for their capital plans. The Fed’s clearance comes roughly a week after it revealed that all banks are capitalized well enough to withstand a severely adverse economic condition as modeled under the quantitative phase of the stress test.

The one company that stood out this time, though, was Capital One (NYSE:COF), which was the only BHC to receive a conditional approval for its capital plan from the Fed. All other banks saw their capital return plans approved unconditionally – including the U.S.-based subsidiaries of Deutsche Bank (NYSE:DB) and Santander, which saw their capital plans rejected last year on qualitative grounds. In fact, Santander’s capital plans had been rejected by the Fed for three consecutive years over 2014-2016.

As has been the trend in recent years, the Fed’s acceptance of the banks’ capital plans for the year was followed by a string of press releases by these firms announcing dividend hikes, share buybacks or both late on Wednesday, June 28.

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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 are gradually returning to the high levels seen just before the downturn.

This year, the Fed found no problems with 33 of the 34 BHCs it tested, and found minor issues with the capital plan of just one BHC (Capital One). 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. But it should be noted here that all participating banks have cleared the quantitative phase of the stress test since 2015, but 2017 was the first time that all banks also cleared the qualitative round of the rigorous process. In Capital One’s case, the Fed observed “material weaknesses in (the bank’s) capital planning practices” – something that the bank will have to satisfactorily address before resubmitting its capital plan by December 28.

What Does Fed Approval Mean For The Banks? 

Banks that cleared the Fed’s regulatory hurdle unconditionally 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 Capital One, the bank is allowed to go through with its conditionally approved capital plan over the remaining six months of this year. The Fed will review its resubmitted capital plan early next year, and decide whether or not to restrict Capital One’s payouts over the first half of 2018 based on how well the bank fixes the inadequacies pointed out.

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

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