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Less to Stress About Over Big Banks’ Financials

Bank stress tests for 2016 have been completed, with the Federal Reserve Board finding that the nation’s largest banks have capital planning processes and adequate capital in place to survive a financial crisis like that of 2008 that caused the Great Recession.

The approvals opened the door for those that passed to be able to raise their dividends and increase the size of their share buyback programs. They didn’t waste any time announcing these plans either, as many of them announced their plan increases within hours of learning of their approvals, and they stated their increases would take effect beginning today.

For investors, this is naturally good news, especially those looking for higher dividends. These investors should be aware of the passing banks’ plans to increase their dividends. If that amount is suitable, investors should take note of the ex-dividend dates, which will alert them to the earliest and latest dates they can buy shares and take advantage of the dividend payout.

 · Second leg

The results of the Comprehensive Capital Analysis and Review (CCAR), which is considered the second leg of the so -called stress tests, were released Wednesday. Of the capital plans of the 33 banks reviewed by the Federal Reserve, only two banks have been sent back to the drawing board because the Federal Reserve rejected their plans. One other firm’s plan was not objected to, but the firm is being required to address certain weaknesses and resubmit its plan by the end of 2016.

The largest banks receiving approval were Bank of America (NYSE: BAC), JP Morgan (NYSE: JPM), Wells Fargo (NYSE WFC), Bank of New York Mellon Corporation (NYSE: BK) and Citigroup (NYSE: C). The plans of Morgan Stanley (NYSE: MS) weren’t rejected, but it must submit a new capital plan by the end of the fourth quarter of 2016 to address certain weaknesses in its capital planning processes.

The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. based on qualitative concerns. The Federal Reserve did not object to any capital plans based on quantitative grounds.

 · Quantitative versus qualitative assessment

Last week, these banks learned their fates from the first leg of the stress tests. Considered to be the quantitative part of the process, the banks were found to be capitalized enough to make it through another financial crisis of the same, if not worst, magnitude from that of 2008.

The CCAR is meant to be a qualitative assessment of the feasibility of the banks’ capital plans.
Specifically, according to the Federal Reserve, quantitative factors include a firm’s projected capital ratios under a hypothetical scenario of severe economic and financial market stress.

Qualitative factors include the strength of the firm’s capital planning process, which incorporate the risk management, internal controls, and governance practices that support the process. If the Federal Reserve objects to a capital plan, the affected bank cannot make any capital distribution, such as dividends, unless expressly authorized by the Federal Reserve.

 · Banks taking advantage of passing tests

U.S. firms have substantially increased their capital since the first round of stress tests in 2009. The common equity capital ratio–which compares high-quality capital to risk-weighted assets – of the 33 bank holding companies in the 2016 CCAR has more than doubled from 5.5% in the first quarter of 2009 to 12.2% in the first quarter of 2016. This reflects an increase of more than $700 billion in common equity capital to a total of $1.2 trillion during the same period.

JP Morgan’s capital plan includes repurchasing up to $10.6 billion between July 1, 2016 and June 30, 2017. It will continue its dividend of $.48 per share for the third quarter of 2016.

Citigroup plans to increase its quarterly dividend to $.16 per share. It will increase its stock repurchase program to up to $8.6 billion during the four quarters starting in the third quarter of 2016.

Wells Fargo did not change its capital plans, but it will continue to pay its $.38 dividend.

Bank of America increased its dividend by 50%, to $.075 per share. It also authorized a $5 billion share buyback.

The Bank of New York Mellon will repurchase up to $2.14 billion of its common stock. It will increase its dividend by 12% $0.19 per share.

 · Watch for the ex-dividend date

If you want to take advantage of these banks’ capital plans to raise their dividends, you should be aware of their ex-dividend dates and record dates.

According to the U.S. Securities and Exchange Commission, when companies declare a dividend, they set a record date when investors must be on the company’s books as shareholders in order to receive the dividend.

Once the company sets the record date, the ex-dividend date is set based on stock exchange rules. The ex-dividend date is usually set for stocks two business days before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment. Instead, the seller gets the dividend. If you purchase before the ex-dividend date, you get the dividend.

 · More improvements still needed?

I wonder when, and if ever, the banks will have enough capital on hand to satisfy the Federal Reserve. The board has noted that, despite general progress, banks still need to improve internal controls around various elements of capital planning.

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