Most U.S. banks and their investors responded jubilantly to the Federal Reserve's release of stress test results on Tuesday, with some announcing plans to raise dividends and spend billions of dollars on share buybacks.
The Fed gave passing grades to 15 out of 19 banks, including JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co. Among the losers: Citigroup Inc, the nation's number-three bank, and MetLife Inc, the nation's largest life insurer.
JPMorgan, the biggest U.S. bank and arguably one of the strongest, kicked off the releases by announcing that it had been cleared to raise its dividend by 20 percent and spend as much as $12 billion buying back stock this year and $3 billion more in the first three months of 2013.
The announcement, which came 90 minutes before the Fed released the results of the other banks, sent JPMorgan and other bank shares soaring. The KBW Bank Index of large-cap financial stocks, which includes most of the banks taking the stress test, rose 4.6 percent before the market closed, having already gained 15.2 percent this year as of Monday's close.
Banks that did not get the rulings they wanted saw their shares fall after the market closed. Citigroup, for example, lost 3.5 percent in after-hours trading.
Because the Federal Reserve had previously said it would announce results on Thursday, it looked as though JPMorgan may have jumped the gun with its announcement.
A senior Fed official said the central bank became concerned Monday night that some information may have inadvertently been released. The official also said there was a miscommunication with JPMorgan and that nobody at the company was at fault.
A person close to the situation who has not been authorized to speak publicly said leaks about the tests on Monday night prompted the Fed to move up the release to Tuesday at 4:30 p.m. EDT (2030 GMT). Then, around noon on Tuesday, there was miscommunication between JPMorgan and the Fed about the hour when JPMorgan would release its statement, the person said.
Chief Executive Jamie Dimon said in JPMorgan's announcement, "We are pleased to be in a position to increase our dividend and to establish a new equity repurchase program. We expect to generate significant capital and deploy that capital to the benefit of our shareholders."
In contrast, State Street Corp said only that the Fed had not objected to its capital plans and that it would "provide further detail in the morning."
Bank of America, which had said it had not asked for permission to raise its dividend or buy back shares, declined to comment on its results even though it passed the test.
Citigroup, which only just missed a passing mark, did not dispute the Fed's decision and said it would submit a revised proposal later this year. Some analysts had expected Citigroup to win permission to raise its dividend to as much as 10 cents from a penny a share.
Citigroup Chief Executive Vikram Pandit lamented recently in the company's annual report that "some of our peers were buoyed by the ability to buy back shares, an option we lacked."
Citigroup investor and hedge fund manager Whitney Tilson said he was surprised that Citi didn't make the hurdle. "They missed very narrowly, in an extreme stress scenario," said Tilson.
Wells Fargo said it increased its quarterly dividend to 22 cents from 12 cents. The bank also said the Fed approved its capital plan, which includes a higher level of share repurchases in 2012 than in 2011, when it bought back 117 million shares.
"Wells Fargo has always managed its business to perform for shareholders through a variety of economic environments and we are pleased that this process again validates the strength of our franchise," CEO John Stumpf said in written announcement.
MetLife said it was "deeply disappointed" with the Fed's testing, which it said was not suited to an insurance company. Though MetLife is the largest life insurer in the United States, its small online deposit-taking operation means it is regulated as a bank holding company.
The Fed objected to MetLife's incremental capital distribution plan, which included an increase of the company's annual stock dividend from $0.74 per share to $1.10 per share, plus $2 billion in stock repurchases. MetLife has said it expected to return capital to shareholders this year, but it purposely left any buybacks out of its 2012 guidance. MetLife stock fell more than 3 percent in after-hours trading.
Ally Financial, whose common capital score fared the worst of all 19 banks under the Fed's worst-case scenario, issued a statement criticizing the stress test assumptions.
The Detroit-based lender said the Fed's analysis "dramatically overstates" mortgage risk, particularly for newer loans, and does not reflect management's ability to deal with risks related to problem loans originated before the financial crisis.
The bank also said that the Fed did not give enough weight to additional capital that Ally could use in a stress situation if the Fed allowed it to do so.
Ally said it plans to submit a revised capital plan in the near future.
SunTrust, the last of the four banks with a capital plan that failed the test, took several hours to issue a statement, during which its shares fell as much as 5.3 percent in extended trading.
SunTrust said its own models were "significantly more favorable" than the Fed's, and that it expected to beat earnings estimates for the current quarter.
DIVIDENDS, SHARE BUYBACKS
Morgan Stanley released a statement more than an hour after JPMorgan, but 17 minutes ahead of the Federal Reserve, saying the regulator had no objection to its 2012 capital plan. That plan includes keeping stable its common and preferred dividend payouts, and potentially using cash to buy another 14 percent stake of its Morgan Stanley Smith Barney joint venture with Citigroup. Morgan Stanley has the option to buy that stake in May.
Goldman Sachs Group Inc, in a statement after the Fed announcement, said the regulator did not object to its capital plan through the first quarter of 2013. The plan includes stock repurchases and a potential increase to its quarterly common stock dividend, which is currently 35 cents per share.
Last year, Goldman spent $6 billion buying back 47 million shares, which is its preferred way of returning capital to shareholders. Management is currently authorized to buy back another 63.5 million shares.
Fifth Third Bancorp, based in Cincinnati, Ohio, said the Fed objected to its bid to raise its quarterly dividend and spend more for share buybacks than it receives in gains from a potential asset sale. The bank said it will resubmit its plan to the Fed in order to address the regulator's objections.
BB&T Corp bumped its quarterly dividend by 4 cents to 20 cents per share, and said it received permission to redeem $3.2 billion in trust preferred securities. "We continue to be one of the strongest capitalized institutions in the industry and believe our 2012 capital actions confirm that strength and our commitment to our shareholders," CEO Kelly King said.
PNC Financial Services Group Inc said it received permission to increase its 35-cents-per share quarterly dividend but did not say by how much. Its board is expected to consider an increase in April. The bank also plans modest share repurchases.
US Bancorp increased its quarterly dividend by 7 cents to 19.5 cents and its board authorized the repurchase of 100 million of its outstanding shares. "Looking ahead, we continue to see a slow, but steady, economic recovery, and we look forward to participating in the revitalization of our markets, while serving the needs of our customers and, importantly, rewarding our shareholders for their investment in our company," CEO Richard Davis said.
Bank of New York Mellon Corp said the Fed cleared its plan to repurchase $1.16 billion of stock over the next 12 months and maintain its current dividend.
Unlike banks eager to pay fatter dividends, Regions Financial Corp said it had launched a $900 million common stock offering as part of a plan to repay $3.5 billion in government bailout dollars. The Alabama-based regional bank said the payback would come after it completes the sale of its Morgan Keegan brokerage unit, pending Federal Reserve and Treasury approval.
"We are pleased with the outcome of the capital plan review and believe it demonstrates the strength of our company," said Regions CEO Grayson Hall.
KeyCorp said it would raise its quarterly common stock dividend to 5 cents per share from the current level of 3 cents per share, and begin a $344 million stock buyback program. The Fed did not object to those plans or the possible redemption of certain trust preferred securities, KeyCorp said.
American Express Co said it plans to repurchase up to $5 billion worth of stock from now through the first quarter of 2013, and raise its quarterly dividend to 20 cents per share from the current level of 18 cents per share. The Fed did not object to those plans, AmEx said.
(Reporting by David Henry, Sam Forgione, Jed Horowitz, Lauren Tara LaCapra, and Katya Wachtel in New York, Ross Kerber in Boston, Rick Rothacker in Charlotte, North Carolina and Ben Berkowitz in Boston. Editing by Andre Grenon and Tim Dobbyn.)