by Jason Jenkins, Investment U Research
Thursday, March 22, 2012
In January, bank regulators voted to release a proposal for how banks with more than $10 billion in assets should conduct stress tests annually. The purpose of the tests is to gauge whether or not individual banks can withstand another major economic downturn.
The tests are now a required cost of doing business due to the 2010 Dodd-Frank financial oversight law. Stress tests have become a key component of how regulators will assess the health of the banking industry.
The Federal Reserve also decided to put banks with more than $50 billion in assets through separate tests to gauge whether they have sufficient capital. The results of these tests came out last week…
Such tests presented a worst-case scenario under which the unemployment rate peaks at 13%, the equity market dives 50 % (which would put the S&P 500 at 685) and housing prices could somehow be more awful and decline by 21%.
Another of these differing scenarios includes a “supervisory stress scenario,” meant to capture the likely environment if another U.S. recession would affect banks with simultaneous slowdowns in other major economies, like those of Western Europe or China.
Withstanding Financial Shock
The Fed is attempting to ensure that banks have enough capital reserves on the books to withstand a financial shock like the one back in 2008 and be able to withstand it without that venomous phrase “government bailout.”
“Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty,” the Fed said, noting that U.S. firms have rebuilt their capital levels on its watch since the first government stress tests of early 2009.
And the public will be made privy to much of the information from these tests. The Fed expects to release bank-by-bank results based on the projections – as it did in 2009, but did not last year. The Fed said the results will consider losses, revenue, expenses, and capital ratios over the planning horizon.
The Federal Reserve also said it will allow a number of the big U.S. banks to raise dividends to a ceiling of as much as 26% of earnings as part of the latest round of stress test results released last week.
“Even with stressful scenarios, the stress tests will demonstrate that banks are in a stronger place, far stronger than in 2008,” said Fred Cannon, Director of Research at Keefe, Bruyette & Woods Inc. in Washington. “We think companies like J.P. Morgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB) will show meaningful increases in dividend and share repurchase plans.”
The big news for investors is that how the institutions graded on this last set of tests determined the possible extent to which they can provide dividends and share buybacks.
Well, the grades are in…
And here are a few of the 15 out of the 19 banks that passed who have already made known their fairly aggressive stock buyback plans and increased dividend:
- American Express (NYSE: AXP) – Passed stress test with 10.8% capital ratio. Raised dividend to $0.20, from $0.18, and authorized $4 billion 2012 buyback, up to $1 billion in 2013.
- Bank of New York Mellon (NYSE: BK) – Passed stress test with 13 % capital ratio and said it will move ahead with $1.16 billion stock repurchase. Also affirmed dividend of $0.13 per share.
- BB&T (NYSE: BBT) – Passed stress test with 6.4% capital ratio. Upped dividend 25% to $0.20 and said Fed did not object to planned redemption of $3.2 billion in trust preferred securities.
- J.P. Morgan Chase (NYSE: JPM) – Passed stress test with 5.4% capital ratio under stressed scenario, including proposed capital actions through 2013. Increased its dividend 20% to $0.30 per share, from $0.25 and authorized a $15 billion stock buyback.
- Regions Financial (NYSE: RF) – Passed stress test with 6.6% capital ratio, announced $900 million common stock offering to go toward repurchasing $3.5 billion in preferred shares owned by the Treasury Department dating back to loans from the Troubled Asset Relief Program (TARP).