Published: Fri, June 30, 2017
Finance | By Kristine Clayton

Fed approves banks' investor payouts

Fed approves banks' investor payouts

If the Fed approves the banks' plans, payouts are expected to be especially rich at the largest American institutions, including Citigroup (NYSE: C - news) and Morgan Stanley (Xetra: 885836 - news), which analysts estimate could return all of their profits to shareholders.

Citigroup was the highlight after hours, doubling its quarterly dividend to 32 cents per common share and announcing a common stock repurchase program of up to $15.6 billion.

It was the first time in seven years of annual "stress tests" that every bank assessed by the Fed won approval for its capital plans.

In an encouraging development for United States banks, this marks the first time in seven years in which all 34 firms under review have passed the second part of exams brought into existence following the financial crisis.

Lofty payouts once made banks hot stocks before the financial crisis exposed many of them as too thinly capitalised.

Fed officials are considering making similar changes to the tests for the largest US banks, including Goldman Sachs, Morgan Stanley and Citigroup. "With strong capital levels relative to our peer group, we believe we are well positioned to continue to both invest in our growth initiatives and return capital to shareholders in order to drive enhanced shareholder returns".

Nevertheless, Capital One was identified for weakness across its capital planning, which the Fed emphasized as needing addressing. The bank only said the plan allows share repurchases, dividend increases, and issuance and redemption of other capital securities.

"I'm pleased that the... process has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes.".

On June 28th the Fed said it had approved the dividend and buy-back plans of all 34 banks tested this year-plans which propose handing shareholders a pile of cash.

Bank of America Merrill Lynch boosted its dividend by 60% to 12 cents a share in addition to a US$12bn buyback program. The dividend was $0.095 per share for the quarter which comes to $0.38 on an annualized basis.

The Financial Select Sector SPDR (XLF) has risen 2% in pre-market trading. Key's Board of Directors will consider the potential dividend increase for the fourth quarter of 2017. As of the latest earnings report the EPS was $0.86 and is estimated to be $1.33 for the current year with 1,096,107,000 shares now outstanding.

The second phase of the results followed qualitative and quantitative examinations of large banks.

As for scandal-plagued Wells Fargo, Sandler O'Neill's principal Jeffery J. Harte said there's a "fairly high likelihood" the Fed will object to the firm's request for higher capital return.

Altogether, banks that went through the tests will be able to pay out 100 per cent of their projected net income over the next four quarters, compared with 65 percent after last year's results, a senior Fed official said. U.S. Bancorp's common stock may be repurchased through June 2018 in the open market or in privately negotiated transactions.

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