Morgan Stanley, Santander must resubmit capital plans after Fed stress test

(Updated, 5:35 p.m. and 6 p.m.)

NEW YORK – Morgan Stanley was alone among the largest U.S. banks in stumbling through the Federal Reserve’s annual stress tests, getting conditional approval to make payouts to shareholders. Thirty other firms passed, while two subsidiaries failed, including Santander Bank.

Morgan Stanley must shore up internal systems and resubmit plans for managing capital by Dec. 29, the Fed said Wednesday. Examiners again failed U.S. units of Deutsche Bank AG and Banco Santander SA, saying they suffer from “broad and substantial weaknesses” in how they manage capital. And one regional lender, M&T Bank Corp., passed only after adjusting its plan for shareholder payouts.

“Morgan Stanley exhibited material weaknesses in its capital planning,” the Fed wrote, listing deficiencies in how the firm designs specific scenarios, shortcomings in its modeling practices, and related governance and control issues. “These weaknesses warrant further near-term attention but do not undermine the quantitative results.”

- Advertisement -

Besides the U.S. unit of Banco Santander SA, which failed for the third consecutive year, banks with a local presence to pass the so-called stress test include Bank of America Corp., TD Group U.S. Holdings LLC, a subsidiary of Toronto-Dominion Bank, and Providence-based Citizens Financial Group Inc.

“We are pleased by today’s CCAR result, which provides us with the ability to increase our dividend and share repurchases as we continue to optimize our capital structure,” said Bruce Van Saun, chairman and CEO of Citizens, in a statement. “We are able to fund robust loan growth and capital return to shareholders given that we remain one of the strongest capitalized banks in our peer group. We remain focused on executing our strategic growth initiatives in order to deliver enhanced shareholder returns.”

Passing the plans means bank boards of directors are permitted to approve quarterly dividends to shareholders. Citizens’ plan submitted to the Fed for the test included a proposed quarterly dividend of 12 cents per share through the rest of the year with the potential of raising it to 14 cents per share in 2017. It also detailed a common share repurchase of up to $690 million, representing a 38 percent increase compared with its last year plan.

Future dividends and stock repurchases, however, are subject to board approval and will be subject to various factors, including Citizens “capital position, financial performance and market conditions,” according to a release. The company has an existing agreement to repurchase $500 million of subordinated notes from its former parent The Royal Bank of Scotland Group PLC, which was approved as a part of its submitted plan.

Following the results, Bank of American announced its plan to increase its quarterly common stock dividend by 50 percent to 7.5 cents per share beginning in the third quarter of this year. Its board of directors also authorized the repurchase of $5 billion in common stock from July 1 through June 30, 2018, subject to further approval.

“Over the last few years, we have significantly strengthened our company and increased our earnings as we execute a straightforward strategy focused on responsible growth,” said CEO Brian T. Moynihan in a statement. “This improvement has allowed us to take a significant step toward returning more capital to shareholders.”

Santander Holdings USA Inc., the parent company of Santander Bank, emphasized in a statement that it has strong capital levels and is working to address the issues identified by the Fed.

“We have made progress, but our internal capital planning, stress testing, internal controls, governance and oversight require further improvement to meet our regulators’ expectations,” said SHUSA CEO Scott Powell. “We are financially sound. These results do not affect our ability to serve our customers. We remain committed to enhancing their experience, helping people and businesses prosper and managing our business to the highest standards in a way that is Simple, Personal and Fair.”

The annual review is a cornerstone of the Fed’s strategy to prevent a repeat of the 2008 financial crisis and taxpayer-funded bailouts by forcing the largest banks to bolster their operations with more capital. Wednesday’s results mark this year’s second and final round, determining whether firms can withstand losses and still pay dividends, buy back stock or make acquisitions.

Investors tune in to see how much capital each company plans to distribute. Analysts estimated before results that the six biggest U.S. banks would pay out more than $60 billion over the next four quarters if the Fed approved their plans. That would be a 22 percent increase over the year ended June, according to figures compiled by CLSA Ltd.

Banks that passed are now free to disclose how much money they may pay out.

Last week, the Fed said all 33 banks subject to the tests have enough capital to absorb losses during a sharp and prolonged economic downturn, the second straight year all firms cleared the exams’ first stage. That review, which didn’t factor in capital plans, showed Morgan Stanley trailing the rest of Wall Street in a key measure of capital. The firm’s projected 4.9 percent leverage ratio tied for last place and fell within a percentage point of the 4 percent regulatory minimum.

Following those results, firms can modify their capital plans to ensure they don’t plan to pay out so much capital that it pushes their ratios below regulatory minimums. Regulators don’t hold it against companies if their original plans are so aggressive that they’re forced to resubmit, a senior Fed official said last week. Buffalo, N.Y.-based M&T Bank was the only firm to do so this year.

Coming into this week, Bank of America Corp. faced what some analysts considered the most pressure to show that it could overcome stumbles in the past two years. The Fed had put the Charlotte, N.C.-based lender on notice that it needed to get better this year, and CEO Brian T. Moynihan responded by allocating more than $100 million to overhaul controls. He also promoted veteran human-resources executive Andrea Smith to chief administrative officer, overseeing the stress-test submission.

The bank, like Citigroup Inc., has paid penny and nickel dividends every quarter since the process began – a fraction of what both firms doled out before the financial crisis.

Bank of America and Citigroup both passed the tests handily, with their common equity Tier 1 ratios remaining well above the 4.5 percent regulatory minimum even after distributing capital to shareholders. Bank of America’s figure dipped to 7.1 percent under a hypothetical economic shock, while Citigroup’s fell to 7.7 percent, according to the Fed.

Tough scenarios

The Fed’s scenarios were seen as especially tough this year as they called for banks to assume – in the most severe case – that U.S. unemployment doubled to 10 percent while the markets tumbled and Treasury yields went negative. The banks would have experienced resulting loan losses of $385 billion, the Fed said last week.

In a lesser “adverse” event, the banks contemplated a minor U.S. recession and mild deflation, while a third was a baseline that tracked the average projections of economists. The scenarios also included some extra hardships for big trading firms, such as Morgan Stanley and Goldman Sachs Group Inc., as they had to assume market shocks and trading-partner woes on top of the other troubles.

Foreign lenders with large U.S. operations also are subject to the Fed’s test. Examiners credited Deutsche Bank Trust Corp. and Santander Holdings USA Inc. with making improvements this year after rejecting their submissions in 2015, but said the assumptions and analyses behind their plans still aren’t “reasonable or appropriate.” The regulator listed deficiencies at both businesses, including in risk management.

This year’s review also raised concerns among examiners that the biggest banks need to bolster auditing systems that identify weaknesses in capital planning. The Fed plans to conduct a more thorough review of those operations in the months ahead.

Next year’s tests may be even tougher. Fed Chair Janet Yellen said in congressional testimony this month that the stress-test process is about to undergo “meaningful changes.” She underlined plans recently announced by Fed Governor Daniel Tarullo that would impose a higher capital target on eight of the largest firms, while giving mid-size banks a break from certain assessments of whether lenders adequately track their market risks.

Providence Business News Staff Writer Eli Sherman contributed to this report.

No posts to display