The Federal Reserve has completed its 2015 Comprehensive Capital Analysis and Review (CCAR 2015) and objected to the capital plans of Deutsche Bank and Santander. However, the Fed did not object to the capital plan and planned capital distributions for 29 other bank holding companies (BHCs).

No firm fell below quantitative benchmarks

The Federal Reserve’s annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S. BHCs. It published its March 2015 report titled “Comprehensive Capital Analysis and Review 2015: Assessment Framework and Results.” The following graph highlights the recent trends in capital levels:

Recent trends of capital levels Deutsche Bank

The CCAR enables the Federal Reserve to evaluate a BHC’s capital adequacy on a forward looking, post-stress basis by reviewing the BHC’s ability to maintain capital above a Tier 1 Common ratio of 5% and above all minimum regulatory capital requirements under expected and stressed conditions. In addition, in the CCAR, the Fed performs a qualitative assessment of practices supporting the BHC’s capital planning process.

The Federal Reserve may object to a firm’s capital plan on either quantitative or qualitative grounds. When the agency objects to a BHC’s capital plan, the BHC may not make any capital distribution unless the Federal Reserve indicates in writing that it doesn’t object to the distribution.

Interestingly, this year, for the first time, no firm fell below the quantitative benchmarks that must be met in the CCAR after some BHCs made one-time downward adjustments to their planned capital distributions or redemptions.

Deutsche Bank, Santander fail the stress tests

However, based on the qualitative assessment conducted in the CCAR 2015, the Federal Reserve did not object to the capital plan or planned capital distributions for the BHCs listed in the “Non-objection to capital plan” and the “Conditional non-objection to the capital plan” columns as indicated in the table below:

Summary of CCAR 2015 Deutsche Bank

However, the central bank objected to the capital plans of the BHCs listed in the “Objection to capital plan” column in the foregoing table. The Federal Reserve observed that each of these BHCs had critical or widespread significant deficiencies in their capital planning process that undermine the overall reliability of the BHC’s capital planning process. Thus, Deutsche Bank and Santander may only make capital distributions that are expressly permitted by the Federal Reserve.

The agency identified numerous significant deficiencies across Deutsche Bank’s risk-identification, measurement and aggregation processes, besides approaches to loss and revenue projection and internal controls. The following table captures the Federal Reserve’s estimates on Deutsche Bank under the “severely adverse scenario:”

Deutsche Bank-Fed estimates Deutsche Bank

In the case of Santander’s CCAR 2015, the Federal Reserve identified specific deficiencies in a number of key areas, including governance, internal controls, risk identification and risk management, besides MIS.

Fed on Santander Deutsche Bank

The Federal Reserve observed that Bank of America exhibited deficiencies in its capital planning process as well. However, it clarified that these deficiencies warrant further near-term attention but do not undermine the quantitative results of the stress tests for the firm. As a condition of not objecting to the bank’s capital plan, the Federal Reserve required Bank of America to remediate these deficiencies and resubmit its capital plan by Sept. 30.

The following table captures the minimum post-stress Tier 1 Common ratios for each of the 31 BHCs under the supervisory severely adverse scenario:

Tier 1 common ratio - Severely adverse scenario Deutsche Bank

The following table sets forth similar information under the adverse scenario:

Tier 1 common ratio - Adverse scenario Deutsche Bank

Analysts react

Analysts at Credit Suisse state:

GS, MS and JPM take the “mulligan”… as anticipated following the DFAST results last week, each of GS, MS and JPM adjusted their capital return plans, with adjustments necessary given the narrower than anticipated “margin of safety” to stressed minimums in the DFAST results.

Analysts from BMO report:

Among our coverage, the winners were C, MS, RF and ZION. We also highlight that KEY has the largest capital return for the third consecutive year among the regionals. And, PNC, DFS and STI all had meaningfully larger buybacks than expected. The loser was BAC.

Analysts from Jefferies note:

Universal Banks: BAC conditional, but gets buyback; Citi gets out with a decent result; JPM buyback smaller than expected. Among the money centers, we believe BAC fared the best relative to pre-CCAR sentiment, given a decent buyback ($4B through 2Q16) even in a conditional approval (must re-submit by the end of 3Q15). JPM fared the worst on a smaller-than-expected buyback ($6.4B through 2Q16) as it needed to use the “mulligan”. C’s pass is a welcome success, with a reasonable dividend increase (to $0.05/ qtr.) and a respectable buyback ($7.8B through 2Q16).

Regional Banks: Most stand tall; WFC smaller implied buyback of $8B-$10B. As a whole, regional bank payouts were above the range of expectations. CMA and RF both announced larger-than-expected buybacks ($393mm and $875mm, respectively), which could bring benefits to ’16 EPS ests., all things equal. BBT, PNC, and STI each slightly beat our payout expectations and successfully moved their payout ratios upward. ZION increased its dividend to $0.06 despite concerns over its DFAST results and was approved for $300mm of preferred stock redemption (+$0.03 to our ’16 EPS est.). USB was just fine, but looks to have been among the more conservative this year. For WFC, our calculations generate a buyback approval estimate of $8B-$10B, inferred from the difference between DFAST and CCAR minimum ratio outcomes and expected dividend progression.

Trust Banks: STT beats low sentiment; BK big number, but with an offset; NTRS inline. STT announced a $0.34/shr dividend and $1.8B share repurchase authorization (through 2Q16). While a little below our expectation ($0.02 potential EPS hit to ’16), we believe the market was concerned about both a qualitative fail and a much lower buyback number. We estimate STT’s payout ratio will be over 90% from 2Q15-2Q16 (including pref. dividends). BK’s buyback was larger than expected ($3.1B through 2Q16), but $700mm of it is contingent on BK raising $1B of preferred stock. On the surface, it looks to be a wash to our EPS estimates, as we already included $500mm of additional preferreds in ’16.

Consumer Finance 2015 CCAR Results: Few Surprises and Capital Return Generally Positive

ALLY: We were expecting a 50% pay-down of ALLY’s Series G preferred. In addition to this, the company announced it can begin to pay-down $1 BB of additional preferred A (in CY16) and other legacy high-cost debt in addition to the 50% Series G pay-down – we note that this is positive in that it includes more capital actions than we expected. Today’s results included nearly $3B of preferred redemptions and ongoing pay-downs of high-cost, unsecured debt. We believe ALLY will focus on extinguishing the remainder of the Series G in the future which could enable a dividend and/ or share repurchase as well.

AXP: American Express again posted a total payout ratio at the high-end of the peer group of ~110% based on our estimates for net income. The company’s capital plan calls for a 12% dividend increase to $0.29 and a $6.6B share repurchase through 2Q16. Our estimates called for a 15% dividend increase with a $6.2B share repurchase, while we note that today’s results are moderately ahead of consensus estimate of a $0.28 per share dividend and $5.0B share repurchase and will likely be viewed positively.

COF: Capital One’s capital return plan exceeded our estimates particularly on the dividend payout. We had conservatively modeled for a flat dividend of $0.30 and an increased share repurchase of $3.4B. Today’s approved plan calls for a 33% dividend increase to $0.40 and a share repurchase of $3.125B through 2Q16. Today’s announced capital actions brings COF’s total payout ratio (share repurchases and dividends) to 80% based on our estimates for net income. As we noted following DFAST, COF’s Tier 1 common ratio in the severely adverse scenario was 9.5%, improving 170bps YoY which we believe supported a more aggressive request from the company. We believe COF’S capital plans exceeded expectations by the largest extent.

DFS: Discover’s capital return plan came in better than our expectations on the heels of a Tier 1 common Ratio of 10.4% – the highest of the peer group. Discover’s capital return plan calls for a 17% increase in the dividend to $0.28, and a $2.2B share repurchase through 2Q16. Our estimates called for an 8% dividend increase with a $1.6B share repurchase. We note that despite today’s positive capital return request, the company continues to grow its capital base as the payout is ~97% of our estimates for net income. Given its robust capital ratios in the severely adverse scenario we believe the company could continue grow its requests for capital actions in subsequent years.

SHUSA: We believe that today’s announcement that SHUSA did not pass on a qualitative basis was primarily anticipated by the market. We highlight that SHUSA has taken several constructive steps towards improving risk control procedures which may well prepare the company for next year’s CCAR. Recall the company recently hired ~100 compliance personnel to assist in its regulatory oversight. We also note that at its recent investor day, SCUSA noted that it was looking for ways to grow earnings that were less capital-intensive (e.g. servicing for others) and we believe the company should be able to navigate any potential balance sheet constraints resultant from SHUSA