Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Fed Gets Ready to Judge Big Bank Plans to Redistribute Cash

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The Federal Reserve plans to unveil Thursday afternoon the results of its review of bank plans for their piles of cash — from mergers to dividends and stock buybacks.

This will be the second half of what is now an annual round of stress tests for the nation's 18 largest banks. Last Thursday, the Fed announced the results of its stress tests: Seventeen banks passed, which means the Fed believes that they would be able to survive a nasty recession or what the Fed calls a "seriously adverse scenario."

But those tests assumed as their baseline the dividends and buybacks approved for last year. The announcement of what is officially known as the Comprehensive Capital Analysis and Review—or CCAR, if you want to sound hip and with it—Thursday afternoon will reveal whether the Fed has approved increased dividends, buybacks or acquisitions for the coming year.

Citigroup and Bank of America probably have the most riding on the announcement. Both banks pay a nominal quarterly dividend of 1 cent a share. Both came out looking quite strong in last Thursday's stress tests, although this was partly an effect of their dividends being set so low last year. Both probably have room for a significant increase in their dividends or buyback plans. (Citigroup, in fact, has already said it has requested a $1.2 billion share buyback.)

Wells Fargo, which was approved last year to pay a quarterly dividend of 22 cents, also showed capital significantly in excess of the 5 percent the Fed deems the minimum for these tests. Analysts expect the bank to reveal an increase in its dividend.

JPMorgan Chase pays a quarterly dividend of 30 cents a share. It was approved for $15 billion in buybacks last year but this plan got derailed by the "London Whale" losses in its Chief Investment Office. JPMorgan's famous "fortress balance sheet" did not fare as well as its mega-bank rivals, in part because of its already aggressive capital distribution plans. It probably can afford a mild increase in its dividend program but it seems unlikely that it would be able to buyback more shares than it planned to last year.

Goldman Sachs was approved for a quarterly dividend of 50 cents per share last year. In the stress test it fared rather poorly, leaving little room for higher capital distributions.

Morgan Stanley is in the same boat. It currently pays a quarterly dividend of 5 cents a share. The Fed saw its capital position plummeting in the "seriously adverse scenario," one of the steepest declines of all the banks tested. This suggests that the Fed thinks Morgan Stanley is especially vulnerable to a serious economic downturn. This leaves the bank with little room to make buybacks or raise dividends.

One word of caution: Although the results of CCAR are expected to be officially released at 4:30pm ET, it's possible that they will come out earlier. The banks will learn of the results prior to the 4:30 release. If a bank believes that its shares are moving on unreleased information that has leaked out, it may decide to release its results early. That's what seems to have happened last year, when JPMorgan released its results early.

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