No longer stressed, big banks open the vaults

Last week, the Federal Reserve released the results of its annual stress testing of bank holding companies (BHCs) and U.S. intermediate holding companies (IHCs), the latter owned by foreign entities, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  Signed into law on July 21, 2010, the Dodd-Frank Act made the most significant changes to U.S. financial regulation since the regulatory reforms prompted by the Great Depression of the 1930s.

Under the framework it developed, the Fed evaluates whether financial firms with at least $50 billion in total consolidated assets are sufficiently capitalized o absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses.  Only Capital One Financial Corp. (COF) was asked to revise its plan, but the concerns were not significant enough to prevent the company from earning conditional approval pending re-submission of its filing.  With that one caveat, for the first time in seven years, all 34 financial institutions' capital distribution plans, weighed in the context of financial condition, passed the test.

Once given the go-ahead, many of the financial institutions disclosed their plans to distribute capital to shareholders, delivering good news of dividend hikes, to levels not seen in a decade, and share buyback expansions.  These developments drove up the aggregate market value of the biggest banks by $25 billion.

• American Express (AXP) announced increasing its quarterly dividend to 35 cents a share from 32 cents and authorizing up to $4.4 billion in share repurchases.
• Bank of America (BAC) announced increasing its quarterly dividend to 12 cents from 7.5 cents and authorizing up to $12.9 billion in share repurchases.
• Bank of New York Mellon (BK) announced increasing its quarterly dividend to 24 cents a share from 19 cents and authorizing up to $2.6 billion in share repurchases.
• Capital One (COF), while maintaining its quarterly dividend at 40 cents a share, announced authorizing up to $1.85 billion in share repurchases.
• Citigroup (C) announced increasing its quarterly dividend to 32 cents a share from 16 cents and authorizing up to $15.6 billion in share repurchases.
• CIT Group (CIT) announced increasing its quarterly dividend to 16 cents a share from 15 cents and authorizing a $225 million share buyback.
• Comerica (CMA) announced increasing its quarterly dividend to 30 cents a share from 26 cents and authorizing up to $605 million in share repurchases.
• Discover Financial Services (DFS) announced increasing its quarterly dividend to 35 cents a share from 30 cents and authorizing up to $2.23 billion in share repurchases.
• Fifth Third Bancorp (FITB) announced increasing its quarterly dividend to 16 cents a share from 14 cents and authorizing $1.161 in share repurchases.
• J.P. Morgan Chase (JPM) announced increasing its quarterly dividend to 56 cents a share from 50 cents and authorizing up to $19.4 billion in share repurchases.
• Morgan Stanley (MS) announced increasing its quarterly dividend to 25 cents a share from 20 cents and authorizing up to $5 billion in share repurchases.
• Northern Trust (NTRS) announced increasing its quarterly dividend to 42 cents a share from 38 cents and authorizing up to $750 million in share repurchases.
• PNC Financial Services Group (PNC) announced increasing its quarterly dividend to 75 cents a share from 55 cents and authorizing up to $2.7 billion in share repurchases.
• Regions Financial (RF) announced increasing its quarterly dividend to 9 cents a share and authorizing up to $1.47 billion in share repurchases.
• Santander Holdings, part of Banco Santander (ADR: SAN), which had failed the stress test previously, announced a one-time dividend of 46 cents a share.
• State Street (STT) announced increasing its quarterly dividend to 42 cents a share from 38 cents and authorizing up to $1.4 billion in share repurchases.
• SunTrust (STI) announced increasing its quarterly divided to 40 cents a share from 26 cents and authorizing a $1.32 billion stock buyback.
• U.S. Bancorp (USB) announced increasing its quarterly dividend to 30 cents a share from 28 cents and authorizing up to $2.6 billion in share repurchases.
• Wells Fargo (WFC) announced increasing its quarterly dividend to 39 cents a share from 38 cents and authorizing up to $11.5 billion in share repurchases.

The stress test report notes that the Fed incorporated the lessons learned from the 2007 to 2009 financial crisis and in the period since in the process of establishing frameworks and programs for the supervision of its largest and most complex financial institutions to achieve its supervisory objectives.  On October 3, 2008, almost two years prior to passage of Dodd-Frank, to stabilize the financial system during the simmering financial crisis, Congress enacted the Emergency Economic Stabilization Act of 2008.  Through the EESA, Congress authorized $700 billion to purchase "troubled" assets via the Troubled Asset Relief Program, the so-called bank bailout that remains controversial.  TARP's bank investment program consists of five components: 1) the Capital Purchase Program, 2) the Supervisory Assessment Program, 3) the Asset Guarantee Program, 4) the Targeted Investment Program, and 5) the Community Development Capital Initiative.

The SAP, for lack of a better acronym, was a supervisory stress-test exercise performed on the nation's 19 largest, most systematically important institutions, and was the forerunner of the Dodd-Frank Act's "supervisory stress testing" of a slightly broader group of institutions.  More contentious was the CPP, which, the Fed emphasizes, was designed to bolster the capital position of viable banks of all sizes and locations, though the program heavily supported banking organizations with less than $10 billion in assets.  The AGP and TIP provided assistance to two institutions, Bank of America and Citigroup.  CDCI provided funding for qualified community development institutions.

For a sense of progress - and perspective - we'll be following up with a look at the capital infusions that these companies received via the CPP initiative of TARP in the form of preferred stock investments by the U.S. Treasury in the midst of last decade's financial meltdown.  Meantime, apparently we can rest easier knowing that our major financial institutions have stabilized and even strengthened, capable of weathering a severe recession, as the Fed embarks on the path of policy normalization regarding interest rates and its balance sheet, which will heavily impact the banking sector.

Robert Stead