Thursday is the first of two critical days this month for the nation’s biggest banks, as they learn from regulators how they fared on so-called “stress tests” and if they’ll get the OK to return capital to shareholders.
Charlotte’s Bank of America is among the banks that have faced the annual tests conducted by the Federal Reserve in the aftermath of the financial crisis. The exams are designed to determine whether large lenders have enough capital to withstand another dire economic slump.
On Thursday afternoon, the Fed will disclose whether banks’ capital ratios meet minimum requirements. That will be followed by the Fed’s announcement next Wednesday of whether it has objected to banks’ plans to return capital to shareholders, such as through stock repurchases or bigger dividends.
Some analysts think Bank of America will fare well in the latest round of tests and not meet objections to its capital plan, but at least one sees a potential problem.
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If the Fed objects to a bank’s capital plan, the lender cannot act on that plan – a setback for shareholders hoping for more capital to be returned to them.
The Fed has objected to Bank of America’s capital plans only once since the stress tests have been required: In March 2011, the bank failed to get approval to raise its then-penny-per-share dividend.
Required under the federal Dodd-Frank financial reform act, the stress tests are the Fed’s annual health check of bank holding companies with $50 billion or more in total assets. In the tests, the Fed looks to see if lenders have sufficient capital to absorb losses and continue operating in an economic downturn.
The tests add to the rising regulatory burden that has weighed on banks’ profits since the financial crisis. But regulators have argued that the tests have better positioned banks to continue to lend to consumers and businesses in a major economic downturn.
In a Tuesday speech in New York City, Fed Chair Janet Yellen said that through stress testing and other supervisory steps, the Fed is “requiring more of large institutions,” according to prepared remarks.
It is not clear what Bank of America or other lenders might be seeking from the Fed in their latest capital plans. Banks typically do not disclose what their capital plans are until after the Fed announces whether it has approved them.
Capital plan at risk?
Morgan Stanley analysts said in a note to investors last week they expect Bank of America to get approval to buy back shares. Marty Mosby, an analyst with Tennessee-based Vining Sparks, also said he thinks the bank will get approval for its capital plans.
Another analyst is less optimistic.
Brennan Hawken, an analyst with UBS Group AG, says there is “real risk” for Bank of America to fail to win approval for its capital plan following a disclosure the bank made in its annual report last month.
Hawken said the higher risk of the bank failing to win approval stems in part from the disclosure that its capital ratios are likely to fall as it works with regulators to demonstrate compliance with new capital rules that are being phased in.
The current stress tests deal with a different calculation for capital, not the ones being phased in.
Hawken says the bank has made a "few public missteps" related to its capital recently, including its disclosure last year that it miscalculated its capital ratios. That error stalled the bank’s plan to raise its quarterly common stock dividend from 1 cent per share, where it had been stuck since the financial crisis.
“When taken together, we believe these factors raise enough questions about BofA's capital planning process to mean a qualitative failure is a real risk this year,” Hawken wrote in a note to investors.
Bank of America spokesman Jerry Dubrowski declined to comment.
The Fed can object to a bank’s capital plans on a so-called “quantitative” basis if its capital ratios aren’t high enough. But banks can also fail for a second reason – under a so-called “qualitative” analysis that takes into account how banks are factoring the unique risks they face into their capital planning process.
New York-based Citigroup is among lenders who did not win approval from the Federal Reserve for its capital plan last year because of qualitative reasons.
Investors will be watching to see whether Bank of America will get approval for the second time since the crisis to raise its dividend.
The bank had to redo its capital plan last year after the discovery of the capital miscalculation in April. Just one month before, the Fed had approved the bank’s plan to increase its quarterly common stock dividend to 5 cents per share and to buy back $4 billion in common stock.
In August, the bank announced it had won Fed approval to raise the dividend to 5 cents after resubmitting its capital plan, but the plan for stock buybacks was scrapped.
The bank’s dividend remains far below the 64 cents per quarter it was paying as recently as 2008.