Fed Test Fails Deutsche Bank, Forces JPMorgan, Goldman, Four Others To Limit Payouts

Tougher Federal Reserve stress tests forced six U.S. banks to scale back proposals for doling out more cash to shareholders, while failing Deutsche Bank’s US unit on “qualitative” grounds:

• The Fed failed the U.S. subsidiary of Deutsche Bank AG, citing “widespread and critical deficiencies” in its planning, limiting the unit’s ability to send capital home to Germany.
• Goldman Sachs Group Inc. and Morgan Stanley — agreed to freeze payouts at previous years’ levels. Both banks were required to rein in their dividend and stock buyback plans after the Fed warned their initial, more bullish, proposals would have left them with inadequate capital buffers.
• JPMorgan Chase, American Express, KeyCorp and M&T Bank Corporation also rethought their original plans for payouts to shareholders, although they got the thumbs up after submitting more modest plans in the past week, the Fed said.

Twenty-eight other firms can proceed with their original proposals to boost stock buybacks and dividends after the Fed found they’d still hold enough capital to weather a hypothetical economic shock.

As the FT notes, given the disappointing results on Thursday for some banks, the industry’s overall payout ratio — capital distributed as a proportion of earnings — was expected to remain roughly unchanged from last year at about 95 per cent.

Even with the more conservative capital plans, Goldman and Morgan Stanley fell below some required capital thresholds. Yet the Fed gave the less punchy payouts the go-ahead anyway. Officials said weakness in the stress test partly reflected the accounting impact of landmark tax reforms that Mr Trump signed into law last year. Randal Quarles, the Fed’s regulatory chief, said they had created “one-time challenges”.

The results overall were weaker than last year, although Fed officials noted that the regime had become stricter this year. They also said the tax reforms reduced banks’ capital ratios just as the stress tests were beginning because the cut in the corporate tax rate from 35 per cent to 20 per cent cut the value of deferred tax assets. Furthermore, Trump reforms eliminated a beneficial tax treatment that had enabled banks to smooth their earnings by carrying losses forwards or backwards from periods of crisis.

And here are select banks’ capital plans announced in response:

• Wells Fargo to Buy Back Up to $24.5b Shrs, Boosts Div to 43c/shr, up from current 39c/shr
• JPMorgan Chase to buy back up to $20.7b of shares, raises dividend to 80c/shr from 56c/shr;
• Bank of America to buy back up to $20.6b of shares, raises dividend to 15c/shr
• Citi to Buy Back Up to $17.6b Shares, boosts dividend to 45c/shr from 32c, est. 41c.
• Goldman Sachs to Buy Back up to $5.0b Shares, Boosts Div to 85c from 80c
• Morgan Stanley to Buy Back Up to $4.7b of Stock, Boost Qtr Div to $0.30/shr from $0.25/shr
• American Express To Buy Back Up To $3.4b Shares, boosts qtrly dividend to 39c/share, from 35c/share
• U.S. Bancorp to Buy Back up to $3B Shares, Boosts dividend to 37c/shr from 30c/shr
• PNC Financial to Buy Back up to $2.0B Stock, boosts dividend to 95c/shr from 75c/shr
• Capital One to Buy Back up to $1.2B Stock, keeps dividends at 40c/shr
• Ally To Buy Back Up To $1b Shares, Boosts Dividend to 15c/shr from 13c/shr