Capital One Gets 'Conditional' Passing Grade on Fed Stress Test -- 2nd Update

By AnnaMaria Andriotis and Christina Rexrode

The Federal Reserve conditionally approved Capital One Financial Corp.'s capital plan in the regulator's annual "stress tests," saying the firm will have to resubmit its plan later this year to address shortcomings in its process.

Capital One's plan was approved Wednesday after the Fed found the bank could keep lending in a severe economic downturn. The approval clears the way for the firm to reward investors by returning more capital.

But the Fed didn't give Capital One a clean pass. Rather, the firm received a "conditional non-objection" after the Fed said Capital One "exhibited material weaknesses in its capital planning practices." Capital One must resubmit its plan by Dec. 28. If the revised plan doesn't satisfy the Fed, the regulator said that it may restrict the firm's capital distributions.

However, Capital One was also one of just two firms to revise lower its capital-return request since results from the first round of stress tests were released last week. If it hadn't revised its request, its hypothetical common equity Tier 1 ratio would have fallen to 5.6%.

It wasn't immediately clear why Capital One revised its request since its initial results didn't breach any of the Fed's required minimum capital ratios.

The other firm to revise its request lower was American Express Co.

The bank is "fully committed to addressing the Federal Reserve's concerns with our capital planning process in a timely manner." said Richard Fairbank, Capital One chairman and chief executive officer, in a company statement. The bank said it expects to maintain its quarterly dividend of 40 cents per share, subject to board approval. Its board has approved the repurchase of up to $1.85 billion of shares of the company's common stock beginning in the third quarter of 2017 through the second quarter of 2018.

In after-hours trading, following the stress-test results, shares of Capital One fell 2.3% to $81.05.

The Fed's test report criticized Capital One's senior management for not being "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 capital plan didn't appropriately take into account the potential impact of the risks in one of its most material businesses, according to the Fed, which didn't specify which business. The report added that the bank's internal controls didn't identify those issues.

Capital One was the only bank to receive conditional approval. But other banks have received similar results in years past, including Morgan Stanley last year. Its revised plan was eventually accepted.

This is the latest in a string of run ins with regulators for Capital One. That has included a consent order with the Office of the Comptroller of the Currency over deficiencies in its anti-money-laundering program. In February, Capital One disclosed that it was under investigation by the New York District Attorney's Office, the Justice Department and the Treasury Department's Financial Crimes Enforcement Network for similar issues. The company has said it is cooperating with the agencies.

The stress tests measure how the banks would fare in a severe recession. The results did find that Capital One has the capital to keep lending in a severe economic downturn. At the low point of a hypothetical recession, Capital One's common equity Tier 1 ratio would be 5.9%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Christina Rexrode at christina.rexrode@wsj.com

(END) Dow Jones Newswires

June 28, 2017 17:26 ET (21:26 GMT)

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