Market commentary: The FED stress tests and the health of the US bank sector

Wednesday 11 March was a day marked in red on the calendar of every bank operating within the US, with the Federal Reserve announcing the final results for its annual stress tests assessing banks, their capital adequacy and their proposed dividends and buyback programs.

The main news was that all US banks passed the FED’s capital scrutiny, with Deutsche Bank Trust Corp. and Santander Holdings USA being the only two banks that did not meet the minimum requirements set by regulators, and therefore will be prevented from paying any dividend or exercise any buyback for the current year.

Citigroup took the spotlight on Thursday after passing the FED stress tests and putting to rest rumors circulated last week that saw the bank’s CEO Michael Corbat close to be replaced if the bank did not receive a full approval from the regulators. The CEO’s job was on unsolid grounds after Citigroup failed to meet regulatory requirements in March 2014, and has consequently been stuck with a 1-cent dividend token per share for the past four quarters.

After being cleared by the FED, Michael Corbat and Citigroup announced that the bank will be paying a 5 cent dividend per share and will initiate a $7.8 billion buyback program to be completed over the next five quarters. Shares jumped as much as 3.3% in early trading on Thursday, closing at $54.08.

Morgan Stanley was perhaps the biggest winner after the Federal Reserve confirmed that the bank’s capital is more than sufficient to withstand sudden and prolonged negative market conditions, and it has therefore approved the bank’s distribution programs.

Morgan Stanley announced on Thursday that it will increase its dividend by as much as 50% to $0.15 per share, while it will also extend its buyback program over the next five quarters to include and additional total share repurchase worth $3.1 billion.

This is a positive confirmation of the success of Morgan Stanley’s Chairman and CEO James Gorman, whose strategy, aimed at repositioning the firm within a changing banking sector, is now generating stable and more consistent earnings. Shares in Morgan Stanley opened higher on Thursday and closed at $37.09 after gaining over 6%.

JP Morgan Chase, the world largest bank by assets, has also passed the FED stress tests and has been cleared to implement its proposed distribution plan. Although reporting revenue that missed analysts’ expectations and declining net income across the board on January 14th, the bank announced that it will increase its quarterly dividend by 10% to $0.44 per share and that it is also authorised to repurchase up to $6.4 billion worth of common stock over the next five quarters. Shares in JP Morgan closed 1.88% higher at $61.37.

Wells Fargo & Co., the largest US bank by market capitalization, also announced that the regulators had cleared its capital adequacy and distribution plans. Despite not disclosing any new buyback program, the bank stated its intention to propose a quarterly dividend distribution of $0.375 per share, up 7% from its current $0.35 a share. The San Francisco-based bank sored yesterday, closing at $55.59 and gaining 3.52% throughout the trading session.

Goldman Sachs Group Inc., the closest among the six major US banks to fail the FED stress tests, managed a narrow pass and saw its distribution program approved after submitting a revised proposal. While the bank intends to increase its quarterly dividend by 5 cent to $0.65 per shares, it did not disclose any new buybacks in addition to ongoing programs.

The bank’s decision to invoke, for the second straight year, its option to resubmit a revised distribution plan highlights the struggle of the firm to continue meeting regulatory requirements, while, at the same time, attempting to improve its return on equity that for the past four years has been at around 11%, down from 30% before the 2008’s financial crisis. Shares in Goldman Sachs traded higher on Thursday, gaining over 3% and closing at $189.95.

Bank of America Corp., which had to scrap its buyback plan last year following an accounting error, managed to receive a conditional approval on Wednesday for a total share repurchase of $4 billion. The lender announced that it will not increase its quarterly dividend at this time, and that the regulators have mandate the bank to resubmit its revenue and loss models in September after finding them unsatisfying. BoA has time until 30th September of this year to present to the FED revised stress test models and better internal controls before to be completely cleared and be able to work on a dividend’s increase.

The rather positive results announced by the FED pictured a healthy banking sector, putting US lenders ahead of European banks in terms of capital adequacy and return of capital to shareholders. All major banks posted sizable gains throughout the session, along with the S&P Banks Select Industry Index that soared 2.39%, returning closed to the $750 level, after falling as much as 90 points in January this year.

This article was issued by Paolo Zonno Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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