To say it's been a busy two weeks for banks would be an understatement. At the end of last week, the Federal Reserve released the results of this year's stress tests, which are designed to determine whether the nation's 18 largest banks have enough capital to survive a severe economic downturn akin to the financial crisis. On the heels of that, the central bank announced yesterday which of these lending giants would be allowed to increase the amount of capital they return to shareholders via dividends and/or share buybacks.
For most of the nation's banks, the news was relatively positive. With regard to the stress tests, 17 of the 18 banks made it through the Fed's "severely adverse" economic gauntlet in one piece -- Capital One Financial (NYSE:COF) being among them. In addition, many of these same institutions had their requested capital plans for the upcoming year approved as well -- Capital One, again, being among the banks to obtain permission. The two most notable exceptions in this regard were the auto-lending giant Ally Financial and Winston-Salem, North Carolina-based BB&T (NYSE:BBT) -- click here to learn why BB&T's request was denied.
In Capital One's case, this translates into a six-fold increase in the company's dividend. As it noted in a press release shortly after the CCAR results were announced: "Capital One's submission included a planned increase in the quarterly dividend on its common stock from the current level of $0.05 per share to $0.30 per share." Once implemented, the move will ratchet up the yield on Capital One's common stock to 2.2% from 0.4% now.
Equally encouraging from the perspective of an investor in Capital One is how well its capital base held up under the hypothetical stressed scenarios, both with the aforementioned capital return included and without it. As you can see in the figure below, going into last week's stress tests, the bank had a Basel I tier 1 common capital ratio of 10.7% at the end of the third quarter of 2012. This was worse than the 18-bank average of 11.1%, but nevertheless better than many of its regional competitors. For instance, the analogous ratios at SunTrust Banks (NYSE:STI), Fifth Third Bancorp (NASDAQ:FITB), and PNC Financial (NYSE:PNC) came in at 9.8%, 9.7%, and 9.5%, respectively.
While this base eroded by 330 basis points to 7.4% after the Fed's apocalyptic economic assumptions were factored into the equation, and a further 70 basis points once the now-approved dividend increase was included, the resulting 6.7% was still comfortably in excess of the 5% regulatory minimum. This is particularly impressive when you consider the size of Capital One's credit card portfolio -- which by their nature are typically riskier than other types of loan holdings.
Following this news, shares of the McLean, Virginia-based bank are trading up by nearly 1%, outperforming the likes of Fifth Third, SunTrust Banks, and PNC Financial. For the year, however, the lender has struggled, watching as its shares have fallen by nearly 11%. While much of this can be attributed to its run-up over the last two years, there's a growing sense of discontent with its method of growth. That is, as opposed to using organic avenues, Capital One has sought to grow quickly through acquisitions.
Last year, for example, Capital One closed on two giant deals. In February, it paid $9 billion to acquire the online banking pioneer ING Direct. And in May, it purchased HSBC's $28 billion U.S. credit card operations. How these ultimately shake out will in large part dictate the performance of Capital One's share price going forward.