US banks celebrate stress test pass
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Financials led a broad rally in New York a day after the Federal Reserve did not fail any of the big US banks’ capital plans, paving the way for a rise in dividends and share buybacks.
Morgan Stanley, Citigroup, Regions Financial and Capital One led the gains on the S&P 500 following the annual stress tests, which are one of the most closely scrutinised annual events by investors.
The approved programmes, which included $6bn-plus buyback schemes by American Express, Citigroup and JPMorgan, as well as double-digit dividend increases at Morgan Stanley, Discover Financial and Capital One, sent the S&P 500 financial index 2.2 per cent higher to 329.31 and the KBW Bank Index up 2.5 per cent to 74.00.
Financials, which include traditional banks, insurance and credit card companies, within the S&P 500 are now on track to pay more than $56.7bn in dividends over the next 12 months, up $2.1bn from the pace a week earlier and more than any other sector within the index, a first since the collapse of Lehman Brothers in 2008.
Analysts with Deutsche Bank said there appeared to be “more flexibility on dividends, given increases in dividends at some banks already above 30 per cent”, and that capital deployment was “slightly better than expected”.
Richard Ramsden, banking analyst with Goldman Sachs, said the tests marked an “important step forward for the banking industry as: 1) no US bank received a qualitative fail that would prevent them returning capital, 2) payouts reached 72 per cent for the industry and were modestly . . . above expectations, and 3) while some banks disappointed on capital returns, the positive surprises were more plentiful and of a larger magnitude.”
Morgan Stanley shares climbed 6 per cent to $37.09, Citigroup advanced 3 per cent to $54.08, Wells Fargo rose 3.5 per cent to $55.59, Regions Financial increased 4 per cent to $9.89 and Capital One added 4 per cent to $81.45.
Intel shares fell 5 per cent to $30.80, wiping $6.5bn from the chipmaker’s market valuation, after the company cut its revenue forecast for the first quarter amid renewed softness in PC demand and currency headwinds from the strengthening dollar.
US banks learn to play the stress test challenge
US banks tend to talk differently about the Federal Reserve’s stress test, depending on whom they’re addressing. In public, they say that the two-part exam — which became an annual event in 2011 — is proving to be a useful discipline, forcing them to get a much better grip on the particular risks they are facing. Privately, they grumble about overkill, denouncing an opaque and expensive process that takes up too much of management’s time.
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The Santa Clara, California-based company now expects first-quarter revenues to range between $12.5bn and $13.1bn, compared with earlier forecasts for $13.2bn to $14.2bn. Analysts on Wall Street had forecast the company would report sales of $13.7bn in the quarter to the end of March.
“The company believes the changes to demand and inventory patterns are caused by lower than expected Windows XP refresh in small and medium business and increasingly challenging macroeconomic and currency conditions, particularly in Europe,” the company said in a statement, referring to the Microsoft software.
Microsoft shares slid 2 per cent to $41.02.
Overall, the gains by the financial sector, along with a larger than expected slide in initial jobless claims, buoyed the wider market.
The S&P 500 climbed 1.3 per cent to 2,065.95, returning to the level at which it opened the year, while the Dow Jones Industrial Average advanced 1.5 per cent to 17,895.22. The technology-heavy Nasdaq Composite rose 0.9 per cent to 4,893.29.
Twitter: @ericgplatt
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