NEW YORK (TheStreet) -- The Federal Reserve's stress-test process was greatly expanded this year and produced more than the usual number of surprises.
The rejection of Citigroup's (C) 2014 capital plan late Wednesday was the most important surprise for bank stocks investors, and no doubt brought about some very bitter feelings among long-suffering shareholders who have been waiting for years for the bank to begin deploying excess capital. The Fed said its objection to Citi's plan to raise its quarterly dividend to a nickel a share from a penny and to buy back up to $6.4 billion in shares was based on "qualitative" concerns and not on the company's level of capital.
The group of banks subject to this year's stress tests was expanded to 30 from 18, with six foreign-held bank holding companies included in the 12 being added to the list. The first part of the tests, known as the Dodd-Frank Act Stress Tests (DFAST) ended last week, with all 30 banks except for Zions Bancorporation (ZION) of Salt Lake City showing they could remain well-capitalized with Tier 1 common equity ratios of at least 5.0% through a nine-quarter "severely adverse" economic scenario.
The second part of the stress tests is the Comprehensive Capital Analysis and Review (CCAR), which incorporates banks' submitted plans to deploy excess capital into the same severely adverse scenario.
This year's stress tests were augmented to include a "global market shock" component that was especially important to Citigroup, which is unique among large-cap U.S. banks in that it derives most of its revenue and earnings from outside North America.
Citi actually passed DFAST with flying colors, with a minimum tier 1 common equity ratio of 7.2%, and there's no question the company has excess capital to deploy. The Fed said its objection to Citi's plan "in part reflects significantly heightened supervisory expectations for the largest and most complex BHCs in all aspects of capital planning."
KBW analyst Fred Cannon on Thursday downgraded Citi to a "market perform" rating from "outperform," and CLSA analyst Mike Mayo late on Wednesday bashed the Fed, writing in a client note, "In the new world of Big Brother Banking, the government can make decisions such as this, even if a bank is well above regulatory minimums, allowing a new level of regulatory discretion. The Fed's decision makes it look like there is no level of capital that is sufficient whereby Citi could repurchase stock."
Mayo stuck with his "buy" rating for Citigroup, but lowered his price target for the shares to $58 from $60.00. Citi's shares were down 5.1% in the first minutes of trading Thursday, to $47.56.
Here's what other Wall Street analyst had to say about other losers and winners following the Fed's CCAR announcement, with Thursday morning stock action not necessarily reflecting the opinions of the analysts:
Bank of America (BAC) announced it had received Federal Reserve approval to raise its quarterly dividend to a nickel from a penny, and to buy back up to $1 billion in common shares from the second quarter of 2014 through the first quarter of 2015. The level of buybacks was a disappointment for many analysts, and bank probably submitted a conservative capital plan because of its $6.3 billion in residential mortgage-backed securities settlements with the Federal Housing Finance Agency and the New York attorney general, which were also announced after Wednesday's market close.
Bank of America said the settlements would reduce its first-quarter earnings by 21 cents a share, which will wipe out most of its earnings, since the consensus first-quarter EPS estimate among analysts polled by Thomson Reuters is 28 cents.
Bank of America came through DFAST with a minimum Tier 1 common equity ratio of 5.9%, according to the corrected figures released by the Fed on Monday, after which the bank lowered its capital-deployment plan. This last-minute lowering of the request between DFAST and CCAR is known as taking a "mulligan."
Citigroup analyst Keith Horowitz in a client note late Wednesday stuck with his "buy" rating for Bank of America and wrote that the disappointing capital return was "largely priced in to the stock" given the pullback over the previous week.
Bank of America's shares were up 1.5% to $17.44 in morning trading Thursday, while the KBW Bank Index (I:BKX) was down 0.4% to 71.76.
Goldman Sachs (GS) also took the mulligan and lowered its planned capital return following DFAST, and was cagey in its capital plan announcement, providing no numbers to investors. CEO Lloyd Blankfein in a statement said, "Our capital plan provides flexibility to manage our capital resources dynamically and return excess capital to our shareholders." Goldman's shares were up 0.4% in early trading Thursday to $162.27.
It was no surprise to see Zions Bancorporation have its capital plan rejected, since the bank failed DFAST last week. But Zions was the only bank to have its capital plan rejected on quantitative grounds. Along with Citi, HSBC North America Holdings (a unit of HSBC (HSBC)), RBS Citizens Financial Group (held by Royal Bank of Scotland (RBS)) and Santander Holdings USA (held by Banco Santander (SAN)) had their capital plans rejected on qualitative grounds.
Zions submitted a capital plan to the Fed that included a $400 million common-equity raise, which the bank said would have brought its minimum Tier 1 common equity ratio under the severely adverse scenario to 4.5%. Zions will submit a revised capital plan by April 30, and Horowitz believes a common equity raise of $630 million may be in store.
Shares of Zions were down 1.8% in morning trading to $29.67. The stock closed at $30.20 Wednesday, down 8% from March 20, when they closed at $32.99 right before the Fed announced the bank had failed DFAST.
JPMorgan Chase (JPM) over the past two years hasn't been able to complete its share repurchases because of the "London Whale" hedge trading losses in 2012 that led to over $6 billion in pretax losses and because of the company's expensive mortgage-backed securities settlements during 2013. JPMorgan late Wednesday announced it would repurchase up to $6.5 billion in common shares from the second quarter of 2014 through the first quarter of 2015, and would raise its quarterly dividend to 40 cents from 38 cents.
Sterne Agee analyst Todd Hagerman in a note to clients Thursday called JPMorgan "the clear-cut winner among the multinationals." JPMorgan's stock was up slightly in morning trading to $59.97.
The big winners among regional banks, according to Hagerman, were PNC Financial Services Group (PNC) of Pittsburgh and SunTrust (STI) of Atlanta, "with sizable increases in their respective share repurchase authorizations."
PNC announced a plan to increase its quarterly dividend by an unspecified amount, and also said it would repurchase up to $1.5 billion in common shares from the second quarter of 2014 through the first quarter of 2015. That's a major increase from estimated gross repurchases of $249.1 million from the second quarter of 2013 through the first quarter of 2014, according to KBW.
PNC's shares were down 0.2% in morning trading to $85.15.
SunTrust was approved to raise its quarterly dividend to 20 cents from 10 cents, and to buy back up to $450 million in common shares from the second quarter of 2014 through the first quarter of 2014. According to KBW, SunTrust completed $286 million in buybacks during the prior-year period.
SunTrust's shares were down 0.7% in morning trading to $39.30.
Another winner from DFAST and CCAR is Discover Financial Services (DFS), which was among the 12 companies added to the stress-test group this year. Discover was alone among the banks in announcing last week that it had requested Fed approval to buy back up to $1.6 billion in common shares and to raise its quarterly dividend to 24 cents from 20 cents. The company's capital plan was approved.
According to data compiled by KBW, Discover and State Street STT of Boston were the only two banks subject to this year's stress tests that completed net share buybacks sufficient to lower their common-share counts by 5% in 2012 and in 2013. Discover seems likely to continue the streak, since its planned buybacks exceed its estimated $1.334 billion in net buybacks completed from the second quarter of 2013 through the first quarter of 2014.
This type of share count reduction is significant, because it raises earnings-per-share and supports a higher stock price. "We continue to believe the company has enough excess capital to sustain a high payout ratio and still meet the minimum regulatory capital requirement," Janney Capital Markets analyst Sameer Gokhale wrote in a note to clients Thursday.
Discover's shares were up 0.6% in morning trading to $57.06.