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Capital One must resubmit plan as 33 banks ace fed tests

Thursday, June 29, 2017 - 10:50

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Capital One Financial Corp was alone among big US banks in stumbling through the Federal Reserve's annual stress tests, getting conditional approval to distribute capital to shareholders. Thirty-three other firms aced the review and are likely to pay out more than analysts had estimated.

[NEW YORK] Capital One Financial Corp was alone among big US banks in stumbling through the Federal Reserve's annual stress tests, getting conditional approval to distribute capital to shareholders. Thirty-three other firms aced the review and are likely to pay out more than analysts had estimated.

The Fed ordered Capital One to shore up risk oversight to address "material weaknesses" and resubmit a plan for managing capital by Dec 28. But broadly, banks subject to this year's tests are expected to pay out close to 100 per cent of their expected earnings over four quarters, substantially higher than the 65 per cent last year, according to a senior Fed official.

It's the first time all banks passed the tests since they started in the wake of the 2008 financial crisis, potentially opening the way for dividends to finally return to lofty levels last seen before that turmoil. Analysts had projected, on average, that banks might boost total payouts to 86 per cent of earnings, according to figures gathered by Bloomberg. Shares of Citigroup Inc, for example, jumped in late trading after it announced plans to distribute as much as US$18.9 billion in dividends and stock buybacks over four quarters - well over 100 per cent of expected profits.

"Many firms continued to improve their capital planning practices," the Fed wrote in a report detailing estimates for how they would perform during hypothetical economic shocks. That includes progress in how they make projections, measure risks and govern themselves, it said.

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Capital One's stumble was a surprise. Some analysts had opined that Wells Fargo & Co might not pass after a retail account scandal exposed control lapses. And Morgan Stanley, which last year had to resubmit a plan for managing capital, trailed the rest of Wall Street on one of the main metrics during an initial round of testing last week. Both firms passed the final round Wednesday.

The Fed faulted how Capital One estimates the potential impact of "risks in one of its most material businesses," the regulator said Wednesday in a statement, without specifying which business. Capital One draws the biggest share of its revenue from credit cards. The Fed said last week that the "recent uptick in delinquency rates in credit card portfolios" is among the stress points for banks being tested.

While the company can proceed with proposed payouts, the Fed said it might yet restrict those distributions if the resubmited plan doesn't adequately address problems. Gatekeepers within the firm failed to discover the issues themselves, the Fed noted.

"The firm's internal-controls functions, including independent risk management, did not identify these material weaknesses," the regulator said. "Therefore, senior management was not in a position to provide the firm's board of directors with a reliable assessment upon which to determine the reasonableness of the capital plan." Capital One's board approved a US$1.85 billion share repurchase program and the firm expects to maintain its quarterly dividend of 40 cents a share, according to a statement from the McLean, Virginia-based company.

The company is "fully committed to addressing the Federal Reserve's concerns with our capital planning process in a timely manner," Chief Executive Officer Richard Fairbank said in the statement, noting that the company plans to update or affirm its guidance for full-year profits when it announces second-quarter earnings next month.

Wednesday's results show that banks across the industry have more room to raise dividends after stockpiling capital in the wake of 2008's financial crisis - but also after the Fed softened how aggressively it measures their ability to withstand severe shocks. This year, authorities dropped one of the toughest components, the so-called qualitative review, for all but the biggest banks.

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