One week ago, the Fed released the first part of its annual solvency stress test, which found that all 33 bank participants had passed, and would not need additional capital even in a severely adverse scenario which looked as follows:
The severely adverse scenario is characterized by a severe global recession accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities. In this scenario, the level of U.S. real GDP begins to decline in the first quarter of 2016 and reaches a trough in the first quarter of 2017 that is 6.25 percent below the pre-recession peak. The unemployment rate increases by 5 percentage points, to 10 percent, by the middle of 2017, and headline consumer price inflation rises from about 0.25 percent at an annual rate in the first quarter of 2016 to about 1.25 percent at an annual rate by the end of the recession. Asset prices drop sharply in the scenario, consistent with the developments described above. Equity prices fall approximately 50 percent through the end of 2016, accompanied by a surge in equity market volatility, which approaches the levels attained in 2008. House prices and commercial real estate prices also experience considerable declines, with house prices dropping 25 percent through the third quarter of 2018 and commercial real estate prices falling 30 percent through the second quarter of 2018.
Today, moments ago the Fed released the second part of its stress test, the Comprehensive Capital Analysis and Review (CCAR), one which gives banks the green light (or in some cases not) to return capital to shareholders.
What it found is that what Morgan Stanley conditionally passed the stress test and was "not objected to" it is required to "address certain weaknesses and resubmit its plan by the end of 2016." The Fed also found that Deutsche Bank and Santander's US units had failed the stress tests. This is what it said: "The Federal Reserve Board on Wednesday announced it has not objected to the capital plans of 30 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). The Board objected to two firms' plans. One other firm's plan was not objected to, but the firm is being required to address certain weaknesses and resubmit its plan by the end of 2016."
Who passed without question? Some 30 companies:
The Federal Reserve did not object to the capital plans of Ally Financial, Inc.; American Express Company; BancWest Corporation; Bank of America Corporation; The Bank of New York Mellon Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; Capital One Financial Corporation; Citigroup, Inc.; Citizens Financial Group; Comerica Incorporated; Discover Financial Services; Fifth Third Bancorp; Goldman Sachs Group, Inc.; HSBC North America Holdings, Inc.; Huntington Bancshares, Inc.; JP Morgan Chase & Co.; Keycorp; M&T Bank Corporation; MUFG Americas Holdings Corporation; Northern Trust Corp.; The PNC Financial Services Group, Inc.; Regions Financial Corporation; State Street Corporation; SunTrust Banks, Inc.; TD Group US Holdings LLC; U.S. Bancorp; Wells Fargo & Company; and Zions Bancorporation. M&T Bank Corporation met minimum capital requirements on a post-stress basis after submitting an adjusted capital action.
Morgan Stanley, however, did not do quite as well, and the while the Fed did not object to the capital plan of Morgan Stanley, it "is requiring the firm to submit a new capital plan by the end of the fourth quarter of 2016 to address certain weaknesses in its capital planning processes."
Finally, "the Fed objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. based on qualitative concerns. The Federal Reserve did not object to any capital plans based on quantitative grounds."
Ironically, just moments after the Fed announced that Morgan Stanley may have deficiencies, it announced that it is boosting its dividend to $0.20/share and will repurchase up to $3.5 billion in stock, adding that it sees itself "fully meeting requirements within the timeline."
MS stock dipped at first, then ripped right back into the green.
And with the Fed out of the way, all other banks have unleashed a veritable feeding frenzy of dividend hikes and buybacks.
- Bank of America Authorizes $5b Buyback; Boosts Div to 7.5c-Share
- Citigroup Plans $8.6b Buyback; Lifts Qtr Div to 16c From 5c
- JPMorgan Chase Plans $10.6b Buyback, Maintains qtr Div at 48c/shr
- Goldman Sachs plans buybacks of stock, boosts quarterly dividend
- American Express Plans $3.3b Buyback, Div. Boost to 32c-Share
- Huntington Bancshares to Boost Qtr Div. to 8c From 7c/Shr
- SunTrust to Lift Dividend 8% Starting 3Q, Sets $960m Repurchase
- U.S. Bancorp to Buy Back $2.6b of Shares, Boosts Div. by 9.8%
- Zions Bancorp Plans to Boost Dividend, Buyback
- Ally Financial announces inaugural dividend of 8c/share, buyback of up to $700m of stock
- Comerica Plans $440m Buyback, Sets div. increase to 23c vs 22c
- M&T Bank Plans Max. $1.15b Buyback; Dividend Raised By Up to 5c
- PNC Plans Share Buybacks Up to $2b, Raise Qtr Div. to 55c/shr
- BNY Mellon Plans $2.7b Buyback, Boosts Dividend
- Northern Trust to Buy Back $275m; Boosts Dividend to 38c Vs 36c
- State Street to Buy Up to $1.4b; Boosts Dividend to 38c Vs 34c
- Bank of New York plans to buy back $2.14b in shares, boost dividend by 12%
- Citizens Finl Group Plans Quarterly Div. 12c/Share, Est. 12c
- BNY Mellon Plans $2.7b Buyback, Boosts Dividend by ~12% to 19c from 17c
- Banco Bilbao Vizcaya Plan Includes Common Dividends of $120m
- KeyCorp Plans to Evaluate Qtr Div. Boost to 9.5c/Shr, Est. 8.5c
- Discover Financial to Buy Back Up to $1.95b of Stock, Boost Div. to 30s/shr from 28c.
We expect many more to boost their dividend and buyback plans before the night is over. And since all of these transactions will be debt-funded, and since other banks will pocket the commission, expect a feeding frenzy of cross bank revenue thanks to yield starved investors who have no choice but to give banks their money all as a result of the Fed's policies which today pushed the 30Y just shy of record low yields.
The full CCAR report can be found here.