Fitch: Large US Banks Meet CCAR Hurdles

Large US bank holding companies (BHCs) met minimum hurdles in the Federal Reserve's 2015 Comprehensive Capital Analysis and Review (CCAR), with resubmissions of capital requests occurring for three of the largest institutions. JPMorgan Chase, Goldman Sachs and Morgan Stanley had very minimal buffers over the regulatory capital ratio minimums after last week's stress test results, making their resubmissions somewhat expected, says Fitch Ratings.

The results reflected continued improvements in bank capitalization levels since the financial crisis, ongoing investments in risk management infrastructure to minimize any qualitative objections, and the importance of banks to be able to resubmit their capital requests following the disclosures of Dodd-Frank Act Stress Test (DFAST) results. There were also corrections to capital ratios from the DFAST results for four banks to reflect corrected data.

Of the 31 banks in this year's annual test, all banks exceeded minimum regulatory capital ratios, marking the first time this has occurred in the past five CCAR cycles. Two foreign-owned banks received objections to their proposed capital plans due to qualitative reasons, while Bank of America received a conditional non-objection. Last year, five banks, including four foreign-owned banks, received qualitative objections.

Bank of America performed relatively well in last week's DFAST, but received a conditional non-objection based on weaknesses in loss and revenue modeling practices and aspects of the company's internal controls. The Fed is requiring Bank of America to remediate these deficiencies and resubmit its capital plan by Sept. 30, 2015. Citigroup, the notable qualitative objection last year, exceeded all regulatory capital minimums with generally the widest margin of its large banks peers. The Fed did not object to Citigroup's capital plan, which included increasing its dividend to 5 cents per share and plans to repurchase up to $7.8 billion of common stock over the five quarters starting in second-quarter 2015, a much anticipated capital distribution for shareholders.

Santander USA failed for a second year in a row due to widespread and critical deficiencies across the BHC's capital planning process. The Fed's objection to Deutsche Bank Trust Corporation's (DBTC) plan was based on numerous and significant deficiencies in risk identification, measurement and aggregation processes, as well as approaches to loss and revenue projections. Although DBTC accounts for only a small proportion of its parent group's business, the Fed assessed its capital planning and stress testing practices based on the standards applied to the largest US banking group's given Deutsche Bank's large US operations. The widely expected objections due to qualitative reasons for these two institutions will not materially affect the capital positions and overall financial flexibility of the US subsidiaries' ultimate parents, Santander S.A. and Deutsche Bank.

Results for the remaining institutions revealed again that the credit card banks, American Express and Discover, appear to have the greatest flexibility with their capital distribution plans. The trust and processing banks, once again ended up with the highest projected capital ratios, while the large regional banks fared generally well.

Several newer features to the CCAR process may have impacted capital plan requests this year, such as the requirement to ensure that an institution is acting on its capital plan, as stated. If a BHC fails to issue as much common stock as outlined in its capital plan, it would be prohibited from subsequent dividends or share repurchases. These actions may contribute to qualitative objections in the future if the regulators deem there to be shortcomings in the capital planning process. In addition, when a BHC adjusts its planned capital distributions, it can only reduce its planned common stock dividends and or share repurchases, preventing a company from subsidizing increases to common dividends with new capital instrument issuances.