GM General Motors Company

By Rachel Louise Ensign 

The U.S. Federal Reserve approved Ally Financial Inc.'s capital plan in the regulator's annual stress test released Wednesday, clearing the way for the firm to pay its first common-stock dividend since going public in 2014.

The quarterly 8-cent payout approved by the Fed is a milestone in the firm's long road to regaining financial health after getting a government bailout during the financial crisis. The firm also got the green light for plans to buy back up to $700 million of stock.

Both measures remain subject to approval by the bank's board. The dividend is expected to start in August.

Ally, spun off from General Motors Co. in 2006 and formerly known as GMAC, is among the largest U.S. auto lenders. In its current form, the bank has branched out into other services like online banking.

Ally's plan was approved after the Fed found that the bank could keep lending in a severe economic downturn.

At the low point of a hypothetical recession, Ally's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 5.2%, above the 4.5% level the Fed views as a minimum. The new ratio, unlike the one reported last week by the Fed in a related test, takes into account the bank's proposed capital plan.

Ally's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, would have reached as low as 5.9% in a hypothetical recession, above the 4% Fed minimum.

The latest stress-test result incorporates quantitative factors assessed in data released by the Fed last week. These included a simulation of how the bank's capital buffers would hold up under a world-wide recession. The Fed's "severely adverse" scenario of financial stress this year included a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

This second-part of the test also included a qualitative assessment by the Fed of a bank's capital-planning process and internal controls. The Fed has the ability to object to a bank's capital plan on either quantitative or qualitative grounds.

The Fed's Wednesday results are arguably the more important part of the stress-test process since it dictates how much capital will be returned to shareholders. Increased dividends and buybacks can help to bolster a bank's share price.

Ally shares rose almost 2% in after-hours trading.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

June 29, 2016 17:54 ET (21:54 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.