Banks Authorized to Buyback $30 Billion in Stock After Stress Tests
Thursday evening, the Federal Reserve released the second part of the stress test results for the nation's largest banks and financial institutions.
In all, 16 of the nation's 18 largest financial institutions had their stress tests and capital plans approved by the Fed, with two of the 16 having to resubmit by the third quarter.
In all, the Fed authorized some $30 billion in new share buybacks, including the first buybacks since the crisis for Bank of America (NYSE: BAC) and Citigroup (NYSE: C). The two banks received the largest government bailouts in the depths of the crisis and the new capital repurchase plans signal new found confidence in the banks.
The internal tests run by the banks did not match the results of the Fed's models and thus the banks must resubmit by the third quarter. Goldman forecast that it would lose some $6.6 billion in the worse scenario, well below the Fed's estimate of $20.5 billion, and J.P. Morgan forecast losing only $200 million whereas the Fed believes losses could swell as large as $32.3 billion.
Staying with J.P. Morgan, investors will see a sharp decline in the share buyback program this year as the bank attempts to met capital requirements ahead of schedule. J.P. Morgan's share buyback program will only purchase an additional $6 billion in stock in 2013, well below the 2012 buyback of $15 billion. However, J.P. Morgan shares have rallied nicely from the post-London Whale low of last summer by some 65 percent.
The two banks to have capital plans rejected were Ally Financial (NYSE: GMA) and BB&T (NYSE: BBT). Ally has remained majority owned by the U.S. government since its bailout in 2009 and objects to the harsh criticism of the Fed, saying that the mechanics of the stress tests are flawed.
American Express (NYSE: AXP) was one of fourteen banks to have its capital plan approved, but only after resubmitting its proposal with a lower capital distribution included. Twelve of these banks also announced dividend increases for the next year, showing that banks are now returning back to the normalcy of returning capital to shareholders.
Bank of America announced a total buyback of $10 billion in its latest stress test. The bank plans on buying back $5 billion in common stock and an additional $5 billion of preferred shares outstanding. The bank did not plan to raise its quarterly dividend from $0.01 per share.
Citigroup also announced a new buyback program, announcing $1.2 billion in share buybacks. The bank did not indicate that it would increase its dividend from $0.01 per share and did not plan any asset sales to bolster capital either.
Wells Fargo (NYSE: WFC) is being touted as a clear winner in the stress tests. The bank announced an increase in the dividend from $0.25 per share to $0.30 and added to its share buyback program. The bank also announced overnight that CEO John Stumpf was to take home $22.9 million in pay for the past year, making him the second highest paid CEO of the major banks behind Goldman's Lloyd Blankfein.
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