Today’s a big day for Bank of America shareholders.
Shortly after the stock markets close, the Federal Reserve is expected to announce whether it has OK’d the latest proposals of the largest U.S.-based bank holding companies to return more capital to shareholders. The announcement is the second, and final, round of this year’s “stress testing” by the Fed of the companies.
Investors in Charlotte-based Bank of America will be watching closely. That’s because if the Fed approves the bank’s capital plan it would mark the second time it has done so since the financial crisis. Although the Fed didn’t object to Bank of America’s capital plan last year, it nixed a plan in 2011 that called for raising its then-penny-per-share quarterly common stock dividend.
At this point, whatever Bank of America might be seeking in its proposed capital plan is a closely guarded secret. Bank holding companies, which had to submit their plans by January, typically do not disclose what’s in them until after the Fed announces whether or not it has objected.
Some analysts expect Bank of America to get approval to both raise its 5-cent quarterly dividend and buy back more shares, although their estimates on the amount of the dividend increase and buybacks differ. At least one analyst, though, says there is “real risk” for the bank to fail to win approval for its capital plan following a disclosure it made in its annual report last month. (You can read more about that analyst’s opinion in this story.)
Since the financial crisis, the nation’s biggest banks must get the Fed’s approval before giving additional capital to shareholders. The Fed reviews the capital plans in the two-step stress testing process.
The first step wrapped up last week, when the Fed said all 31 bank holding companies met capital ratio minimums after being run through hypothetical economic downturn scenarios.
Under the second step, the Fed examines how banks’ capital ratios would fare under hypothetical downturns if their proposed capital plans were put into action.
Even if banks clear the first part of the stress tests, there’s no guarantee the Fed will OK their capital plans.
A bank can meet capital minimums and still fail the tests for “qualitative” reasons if the Fed feels the bank is not factoring the unique risks it faces into its capital planning process.