Credit Suisse analysts led by Moshe Orenbuch expect the 2014 Comprehensive Capital Analysis and Review (CCAR) tests to continue to show improvement in capital for U.S. bank holding companies (BHCs). Common equity tier 1 capital went up by 8% or $73B since last year.

Basel 1 tier 1 common equity and ratios

As the chart above shows, all companies subject to CCAR process have common equity tier 1 capital ratios above 9%. Moshe Orenbuch and his team postulate that with these capital levels all firms reviewed could pass the 5% common equity tier 1 capital “stress” scenario threshold imposed by the Federal Reserve. A more stringent Dodd-Frank Act (DFA) stress test scenario may result in a 15% increase in total CCAR losses year over year in 2014 resulting in an average common equity tier 1 capital stressed level of 8.6%, versus 2013’s average of 11.7%.

Historical and stressed tier 1 common ratio using DFA assumptions Banks

“Qualitative” aspect of CCAR may lead to some stress test failures

The Fed’s qualitative evaluation requires banks, especially large banks, to support strong stress testing, capital planning and risk management processes. Large banks that exceed capital thresholds may be subject to a higher qualitative review standard as they pose a more significant risk to financial markets shall they fail. Also, large banks have more complex exposures which call for more sophisticated policies and processes. Moshe Orenbuch’s team believes that some banks may pass the quantitative element of CCAR but still fail to get full approval for their capital plans.

Furthermore, Orenbuch thinks that BHCs going through CCAR for the first time may have lower marks on their qualitative evaluations relative to other BHCs as their processes are being reviewed by regulators for the first time. There are 12 new participants in CCAR for 2014, which include 6 foreign bank subsidiaries.

CCAR 2014

The Fed may object to a bank’s capital plan because of:

  1. Material unresolved supervisory issues
  2. Inadequate assumptions and analyses in the capital plan
  3. Inadequate risk measurement, risk management, governance and controls
  4. Proposed capital distributions and/or CCAR assessment are deemed unsafe or unsound

Capital return will focus on share buybacks; banks desire flexibility

Moshe Orenbuch’s team estimates that total capital return (dividends and share buybacks) will jump by 13% relative to last year to 60%. Median dividend payout ratios will improve 4% to 26% relative to 2013. Orenbuch believes that State Street Corporation (NYSE:STT), Northern Trust Corporation (NASDAQ:NTRS), Goldman Sachs Group Inc (NYSE:GS), American Express Company (NYSE:AXP), Discover Financial Services (NYSE:DFS), Comerica Incorporated (NYSE:CMA), The Bank of New York Mellon Corporation (NYSE:BK), KeyCorp (NYSE:KEY) and U.S. Bancorp (NYSE:USB) are best positioned to return capital this year. The Fed will continue to support share buybacks over dividends as the former provide more flexibility to banks.

CCAR