In the banking sector, this week was dominated by Wednesday's release of the Comprehensive Capital Analysis and Review (CCAR, for those who want to conserve their oxygen). This was the second part of the Federal Reserve's stress tests for this year, and it mattered -- it was the component in which the Fed gave its thumbs up or down to banks' capital allocation proposals.
The regulator had no objection to the plans of 25 out of the 30 tested banks. That was great news... unless, of course, you're a shareholder in one or more of the miscreants. The five offenders weren't small fry, either -- a notable inclusion was Citigroup (NYSE:C), sharing a jail cell with the American wings of European lenders Banco Santander, HSBC, and RBS, plus domestic regional Zions Bancorporation.
All five are, in the Fed's words "required to resubmit their capital plans... following substantial remediation of the issues that led to the objections." Back to the drawing board, in other words.
Skipping to the sunny side of the street, Citi's successful incumbent peers JPMorgan Chase, Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) all have the go-ahead for their plans. For JPMorgan Chase, this means an increase of its quarterly dividend to $0.40 (from the most recently declared $0.38), and the launch of a $6.5 billion common share buyback program. The dividend is subject to board of director approval but really, who's going to object to the idea?
Ditto for Wells Fargo, which wants to lift its quarterly payout to $0.35 per share (its latest was $0.30).It's also going the buyback route, increasing its initiative to the tune of 350 million shares, for a total of a whopping $17 billion or so. Wells Fargo has the money, no doubt, but it raises the question of whether this is the best way to spend it.
Bank of America is going to quintuple its dividend. This sounds a lot more impressive than saying "boost its wafer-thin $0.01 distribution by $0.04 per share." Still, an increase is an increase, and Bank of America's shareholders have been hungry to get one for quite a while. The lender's board has authorized a $4.0 billion share buyback plan, which sounds a lot saner than Wells Fargo's $17 billion-plus shopping spree.
Then again, Bank of America has other uses for its mattress money. On Wednesday (yes, Hump Day was particularly busy this week), the company announced it agreed to a settlement with the Federal Housing Finance Agency -- the conservator of mortgage guarantors Freddie Mac and Fannie Mae. FHFA had filed four lawsuits against Bank of America and associated entities, claiming that they made fraudulent claims about some of their mortgage-backed securities.
The settlement will see the company pay Freddie and Fannie roughly $6.3 billion in cash, plus take around $3.2 billion worth of those MBSes off their hands. Bank of America estimates that this will slice its Q1 pre-tax income by $3.7 billion, equating to $0.21 per share net. Gulp.
That aside, the news was overwhelmingly good for the sector this week. That CCAR tally of 25 out of 30 is a very good score; just ask the shareholders who will soon get more bang for their buck when those new dividends hit their wallets.