Bank of America on Thursday won approval from the Federal Reserve for its resubmitted “stress test,” clearing the Charlotte company to continue repurchasing common stock and paying a 5-cent dividend on common shares.
The announcement hands an important victory to CEO Brian Moynihan, who in March was told by the Fed that the bank had to fix “deficiencies” and “weaknesses” in its capital planning processes. March’s findings marked the third stress-test misstep in five years for Bank of America, which has had more snags with the tests than any of the largest U.S. banks.
The Fed conducts the annual stress tests on the largest lenders to make sure they have enough capital to withstand another economic downturn. If banks stumble on the tests, the Fed can restrict them from returning capital to shareholders, such as through stock repurchases and dividend increases.
On Thursday, the Fed said Bank of America has made progress in fixing the deficiencies, which included weaknesses in aspects of the bank’s loss and revenue modeling practices and its internal controls. But the regulator also indicated the bank has room for more improvement.
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In a statement, the Fed said Bank of America “must continue to make steady, demonstrable progress” before next year’s stress test. Progress must be made toward establishing and maintaining “sound risk-management and capital-planning processes,” the regulator said.
Banks have to submit their 2016 capital plans to the Fed by April 5, and the regulator will release its results by June 30. That’s a later timeline than years past, when the companies submitted plans in January and heard back from the Fed in March. Banks can’t raise dividends or launch new stock purchase plans until they get Fed approval.
At Bank of America, Charlotte-based Chief Administrative Officer Andrea Smith will oversee the upcoming exam. She was named to the newly created CAO role in July, a change from her previous role as global human resources executive.
Bank of America declined to comment Thursday beyond a press release that announced the Fed’s decision.
The Fed used stronger language with Bank of America on Thursday than it did in 2013 when it announced approvals for Goldman Sachs’ and JPMorgan Chase’s resubmitted stress tests. At that time, the Fed did not say those banks must continue making progress.
Independent bank analyst Nancy Bush said she was not surprised by the Fed’s “admonition” to Bank of America.
“It just reflects the widely held belief that, even after all the bank has been through, that there still is more to do in terms of operational restructuring and risk assessment,” said Bush, who called the Fed’s approval of Bank of America’s capital plan “very welcome news.”
Thursday’s announcement also marks a win for Bank of America investors eager for the bank to return more capital to them.
Last year, the bank won the Fed’s approval to increase its quarterly common stock dividend to 5 cents a share from 1 cent. That’s still far below the 64 cents per quarter the bank was paying as recently as 2008.
Bank of America did not request a dividend increase as part of the capital plan on which the Fed ruled in March.
That plan called for the bank to buy back $4 billion in common stock. The Fed gave the bank conditional approval for the plan after discovering the capital planning deficiencies, and it told the bank the regulator could halt the repurchases if the bank did not fix the issues.
Through the third quarter of this year, the bank says it has repurchased $1.6 billion of the $4 billion.
Bank of America’s previous stress test gaffes took place in 2011 and 2014.
In 2011, the Fed nixed a plan that called for raising Bank of America’s 1-cent dividend. In 2014, the bank had to scrap a plan to buy back $4 billion in stock and delay a plan to increase the dividend to 5 cents after the bank disclosed it had been miscalculating its capital ratios.
In an effort to win approval for its latest capital plan, which it resubmitted in September, Bank of America appointed Terry Laughlin, a New York-based direct report to Moynihan, to head the resubmission. The bank also said it has spent about $100 million this year to fix its stress-test processes.
“This was a must-pass test for (Bank of America),” Ken Thomas, a Miami-based bank consultant, said, “after all the public attention directed to it, the $100 million they put into it, the army of new employees and consultants they hired.”
Bank of America shares rose less than 1 percent to $17.20.