BRK.A Berkshire Hathaway Inc

By Liz Hoffman and Ryan Tracy 

Big U.S. banks plan to increase dividend payouts and share buybacks to their highest levels in years after the Federal Reserve on Wednesday approved capital plans for all 34 firms taking part in its annual stress tests.

The approvals -- the first time since the annual tests began in 2011 that all firms got passing grades -- reflect a turning point for big financial institutions that have been shackled by tighter regulation since the financial crisis. They could also herald a return to precrisis days when banks were reliable dividend payers and shareholders flocked to them.

Bank of America Corp., for example, said that it would increase its dividend by 60% to 12 cents a share per quarter, putting it above a threshold where Warren Buffett's Berkshire Hathaway Inc. may convert a stake in the firm into common stock and become the bank's largest shareholder. The second-biggest U.S. bank by assets also said it received approval to repurchase up to $12.9 billion of its shares, far above the $7.7 billion it bought back over the previous year.

On average, the group of firms taking part in the stress tests requested payouts that are near 100% of their expected earnings over the next year, up from 65% last year, senior Fed officials said. That means banks in some cases will be able to start whittling away at capital buffers that many bank executives say are well in excess of what is needed to absorb potential losses.

Such moves signal an easing of the Fed's hardline stance toward banks since the crisis and could provide a durable pillar of support for higher bank stock prices. Those soared following President Donald Trump's election but largely have treaded water so far in 2017 amid lackluster economic indicators, political defeats for the White House and a flattening yield curve that threatens to weigh on bank profits.

The KBW Nasdaq Bank index is up 2.8% year to date versus an 8.9% gain for the S&P 500. That said, bank stocks are still well ahead of the broader market when measured from November's election. Big-bank shares rose in many cases more than 1% in after-hours trading Wednesday, while some, like Citigroup Inc., were up more than 2%.

The payouts announced by banks following the tests' release Wednesday were in many cases above what investors had expected.

Citigroup, for instance, said it planned to return $18.9 billion to shareholders over the coming four quarters. That is equal to 132% of what Wall Street analysts expect the bank to earn over the same period. Analysts had expected the bank's payout ratio would be around 110%.

Morgan Stanley and Alabama-based Regions Financial Corp. were also among those that were approved for payout ratios in excess of 100%, according to FactSet estimates and Wall Street Journal reviews of corporate filings.

"The absolute minimum is there won't be increased capital in these businesses," Morgan Stanley Chief Executive James Gorman said earlier this month. "There shouldn't be and there won't be."

Morgan Stanley, Goldman Sachs Group Inc. and State Street Corp. cleared one of the Fed's yardsticks by just tenths of a percentage point, suggesting they have gotten more adept at figuring out how to squeak through the tests.

The latest result was the second part of the Fed's test results. In the first leg, released last week, the Fed said all big U.S. banks were able to survive a hypothetical recession.

Fed governor Jerome Powell said the stress-test process, now in its seventh year, "has motivated all of the largest banks to achieve healthy capital levels."

Born of the financial meltdown, the stress tests have come to command bankers' and investors' attention each year. Executives manage with the tests in mind and have collectively spent billions of dollars to develop risk-management systems to meet the Fed's expectations.

This year's passing grades suggest that those efforts have paid off. Banks today are better capitalized and more conservatively managed than in the years before the financial crisis and have better insight into risks lurking in their own books.

J.P. Morgan Chase & Co., the nation's biggest bank by assets, was approved for a 12% increase to its dividend and a $19.4 billion buyback program. CEO James Dimon said the bank was "pleased to further increase capital returns to our shareholders while continuing to invest in our businesses."

In a nod to progress at banks, the Fed has made changes to the exams. This year, only 13 of the biggest, most complex banks faced a qualitative exam of their risk-management abilities. Others, such as the U.S. arm of Spain's Banco Santander SA, had to pass only a numerical assessment.

The results had some banks breathing sighs of relief. At Santander, the U.S. chief executive said he planned to hold a champagne toast in the boardroom after the Fed approved its capital plan. The bank had failed the tests the previous three years.

Wells Fargo & Co.'s approval, too, is a sorely needed win for the bank, which has been in the spotlight for months over a sales-practices scandal. Some analysts had predicted that the Fed might flunk Wells Fargo on "qualitative" grounds even if it passed the numerical part of the exam.

Wells Fargo Chief Financial Officer John Shrewsberry said this spring that the bank was "very self-aware" of that risk and that it had "sized our [capital-return] ask appropriately."

The Fed said the largest and most complex firms, however, still have work to do in maintaining accurate data and identifying risks in new products.

One spot hit hard this year was credit cards. Credit-card defaults are rising after years in record-low territory and were a chief focus of Fed officials who designed this year's tests. Last week's results forecast $100 billion of credit-card losses in a severe downturn across the industry.

Two of the largest standalone card issuers, Capital One Financial Corp. and American Express Co., revised their payout requests downward after receiving the results of the stress test's first part last week.

The Fed approved Capital One's plan, but only contingent on the firm resubmitting it within six months to address what the regulator called "material weaknesses."

The bank is "fully committed to addressing the Federal Reserve's concerns with our capital planning process in a timely manner." Richard Fairbank, Capital One chief executive, said in a statement.

Some executives still say the Fed's process is overly opaque and stringent and have complained that the higher capital required by them has choked lending and harmed the economy.

The Trump administration has been sympathetic to bankers' complaints and recently recommended changes to the tests.

--Christina Rexrode contributed to this article.

Write to Liz Hoffman at liz.hoffman@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

June 28, 2017 19:55 ET (23:55 GMT)

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