Updated to include a discussion on Citigroup's stress test failure, and with closing prices and updated returns.
Investors cheered the Salt Lake City lender's announcement that t had received the Federal Reserve's permission to repay federal bailout funds received through the Troubled Assets Relief Program, or TARP, without raising common equity.
JPMorgan Chase (JPM) started the stress test party Tuesday afternoon, while the market was still open, by announcing an increase of its quarterly dividend to 30 cents from 25 cents, and a $15 billion stock buyback plan. This caused the Federal Reserve to move up its public stress test announcement by two days, to Tuesday, following the market close.The broad indexes were mixed on Wednesday, while the The KBW Bank Index (I:BKX) rose over 1% to close at 48.12, following Tuesday's 5% increase heading into the stress test results announcement. Bank of America (BAC) was a big winner in the stress tests, even though the company didn't request permission from the Fed to increase its one-cent quarterly dividend or to buy back shares. The Federal Reserve enhanced its regulatory credibility by basing the stress tests on a particularly harsh economic scenario, included real U.S. GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013." In addition, under the Fed's adverse scenario, "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012." Investors breathed a sigh of relief, sending Bank of America's shares up over 4% on Wednesday, to close at $8.85, following a 6% increase the previous session, after the company passed the stress tests with flying colors. In its stress test results announcement, the Federal Reserve estimated that Bank of America's Tier 1 common equity ratio under the adverse economic scenario would be 5.7%, increasing to an estimated 5.9% at the end of 2013. Some analysts had thought that Bank of America might fail the stress tests with an estimated Tier 1 common ratio below 5% under the economic scenario. Bank of America's have now risen 59% year-to-date, following a 58% drop during 2011. Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.
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