(Adds capital actions from banks, details on Morgan Stanley (NYSE:MS)
conditional approval, Deutsche Bank holding company
reorganization)
By David Henry and Patrick Rucker
NEW YORK/WASHINGTON, June 29 (Reuters) - Nearly all of the
largest U.S. banks are on steady enough footing to increase
payouts to shareholders, the U.S. Federal Reserve said on
Wednesday, with just two subsidiaries of foreign banks failing
its annual stress test.
The results show that big U.S. banks have not only built up
significant capital since the 2007-2009 financial crisis but
that management teams have largely proven the merit of their
internal disaster planning to the Fed.
However, the Fed criticized some elements of Morgan
Stanley's MS.N capital planning process - but still allowed
the bank to move ahead with plans for a $3.5 billion stock
repurchase program and a quarterly dividend hike while it
rectifies the issues.
The regulatory thumbs up prompted a slew of announcements
from banks who plan to buy back more stock or increase dividends
- good news for investors who saw their banks shares hammered by
Britain's vote last week to leave the European Union.
The two banks that failed - Deutsche Bank Trust Corporation
and Santander Holdings USA, which are subsidiaries of Deutsche
Bank AG DBKGn.DE and Banco Santander SA SAN.MC - have also
failed in the past. "Broad and substantial weaknesses" persist
in their capital planning processes, the Fed said.
The rejection of their capital plans - the third year in a
row for Santander and the second straight year for Deutsche -
means that they cannot return any profits home.
(Click here to see how the banks performed: http://tmsnrt.rs/293nwd2)
The Deutsche Bank unit that failed holds its transaction and
wealth management businesses in the United States. The bank is
consolidating its U.S. business into a new holding company on
July 1 called DB USA Corp, a larger unit, which will have its
capital plan reviewed by the Federal Reserve in 2018, the
company said.
Despite their failures, Deutsche and Santander have
improved, a senior Fed official said on a call with reporters.
On a quantitative basis, all 33 banks that participated in the
Fed's stress tests this year easily passed minimum capital
requirements.
Those banks have more than doubled their capital since the
crisis, adding more than $700 billion in common equity capital
from the beginning of 2009, according to the Fed.
While the Fed's stress tests are only hypothetical scenarios
and the evaluations are subjective, the process is forcing banks
to be better prepared for real life events.
Market turmoil that followed the British referendum last
week is a good example, said Mike Alix, a bank consultant at
PricewaterhouseCoopers and a former supervisory official at the
Federal Reserve Bank of New York.
"The benefits of CCAR are an absolute rise in capital ratios
and risk management," said Alix.
The Fed's checks on the quality of risk management and
capital planning "are driving improvements in governance,
infrastructure and controls" at the banks, he added.
SECOND CHANCES
At least one bank each year has failed to have its capital
plan approved since the Fed began issuing pubic verdicts in
2012. Those that have failed in the past, including Ally
Financial Inc ALLY.N and Citigroup Inc (NYSE:C) C.N , passed this
year, as did those that previously received "conditional"
approvals, like Bank of America Corp (NYSE:BAC) BAC.N .
Morgan Stanley's conditional approval on Wednesday was the
result of "material weaknesses" in the way it designs and models
stressful scenarios. Morgan Stanley has until Dec. 29 to
resubmit its capital plan and rectify those shortcomings.
Although the Fed said the problems deserve attention, they
were not substantial enough to undermine Morgan Stanley's
quantitative stress test success. The bank would still produce a
ratio of high quality capital to assets of at least 7.7 percent
in severely adverse scenario, well above the regulatory minimum.
Morgan Stanley's announcement on Wednesday afternoon that it
would repurchase up to $3.5 billion of additional common stock
was above the average analyst estimate of $2.8 billion,
according to FactSet StreetAccount. It also said it would raise
its quarterly common stock dividend to 20 cents, above the
18-cent analyst estimate.
Morgan Stanley shares rose 0.8 percent to $25.43 in
after-hours trading.
Several other banks that passed the Fed's test, including
JPMorgan Chase & Co (NYSE:JPM) JPM.N , Bank of America, Citigroup, Goldman
Sachs Group Inc GS.N and Wells Fargo (NYSE:WFC) & Co WFC.N , also said
they would buy back more stock or increase dividends.
The results, from a process known as CCAR, come after the
Fed released results of a separate stress test, dubbed DFAST,
last week. CCAR is a more nuanced examination, in which the Fed
models unique circumstances for each individual bank, and can
fail banks for the way they go about capital planning as well as
whether they technically pass a numerical threshold.
Banks had a few days to resubmit their capital plans last
week if they felt that they were on shaky ground. M&T Bank Corp (NYSE:MTB)
MTB.N was the only bank to do so.