Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) and Banco Santander, S.A. (ADR) (NYSE:SAN) (MCE:SAN) who failed the Fed’s CCAR on qualitative grounds, have to undertake remediation of the issues that led to the Fed’s objections, point out Jefferies analysts.
Joseph Dickerson and team at Jefferies in their recent report dated March 27, 2014 point out that these three banks may not increase distributions without written permission from the Fed.
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Fed rejecting capital plans of Citigroup, RBS and more
The Federal Reserve on Wednesday announced it has approved the capital plans of 25 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). The Federal Reserve objected to the plans of the other five participating firms–four based on qualitative concerns and one because it did not meet a minimum post-stress capital requirement.
Based on qualitative concerns, the Federal Reserve objected to the capital plans of Citigroup Inc (NYSE:C); HSBC North America Holdings Inc.; RBS Citizens Financial Group, Inc.; and Santander Holdings USA, Inc.
The Jefferies analysts point out that the Fed either approves or rejects a bank’s capital plan based on quantitative requiring maintenance of a T1 common ratio of over 5% under stressed conditions and qualitative factors implying deficiencies in capital planning processes / governance / control.
The analysts note while none of the US bank holding company (BHC) subsidiaries of European banks had their capital plans rejected on quantitative factors, RBS Citizens, HSBC North America and Santander Holdings USA all faced rejection on a qualitative basis.
The following table captures the projected minimum Tier 1 common ratios for the BHCs:
The analysts point out that when the Fed objects to a bank’s capital plan, the bank has to draw up remediation plans and may not increase capital distributions relative to the prior year. More importantly, the analysts note the Fed doesn’t object to a continuation of current capital distributions.
Why banks failed on qualitative basis?
Analyzing the possible reasons for the banks failing the Fed’s tests, the Jefferies analysts note complexity of the BHCs might have played a role. Drawing attention to the Fed’s observations, the analysts point out the Fed has significantly heightened supervisory expectations for the largest and most complex BHCs. Moreover, the analysts believe the Fed would naturally expect complex institutions to have the most sophisticated, comprehensive and robust planning processes.
The Jefferies analysts anticipate $1.2 billion of capital to be returned from Citizens to Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS) in 2014, which is equivalent to 2013. As there is no quantitative need for capital, the analysts don’t anticipate material change to Citizen’s IPO timing.