Thursday, March 12, 2015

Stress Test 2015 Results; Capital Levels Strongest Since 2008 but Big Banks Still Struggle

The 2015 Federal Reserve’s Comprehensive Capital Analysis and Review had largely positive effects on the Street. For this first time ever, all 31 banks tested were found to have adequate capital and would be able to continue lending in a severe economic downturn. While banks have continued to strengthen their capital positions, four of the six largest U.S. struggled to pass the tests.

Citigroup, which had failed the test two times in the last three years, earned approval for its capital plan- a major goal of CEO Michael Corbat. Citigroup was given the green light to raise its quarterly dividend (which has been around one cent since 2008) to $0.05. The bank was also given approval for the buy back of up to $7.8 billion of its own shares, up from $1.2 billion in the previous year. Citigroup traded up 3.34% on the day, closing at around $54.08

Bank of America (BAC) has problems with their internal controls. The bank needs to resubmit its capital plan before winning approval for boosted shareholder returns. Bank of America has until September to submit a new capital plan.  The weakness in their capital plan comes from their loss and revenue modeling practices in their internal controls. Investors expected a complete rejection of Bank of America, however regulators only rejected some of their plan. Bank of America is planning on a $4 billion dollar stock buyback. As of midday Thursday (3/12/15), BAC is trading lower at -1.12%. (Paragraph Contributed by Mike Lorka)

Deutsche Bank and Santander Bank were the only 2 banks to pass the first round capital tests but fail the Fed’s qualitative analysis. The main reason these banks failed was for their inability to model losses and identify risks.

Overall, the 2015 CCAR had positive effects on the financial sector. Heading further into 2015, I believe this is just another positive event that reiterates my view of strong expected performance for the financial sector. We will continue to monitor BAC closely as the process of resubmitting its capital plan unravels. 

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