Morgan Stanley was alone among the largest U.S. banks in stumbling through the Federal Reserve's annual stress tests, getting conditional approval to increase payouts to shareholders. Thirty other firms passed, while two subsidiaries failed.
Morgan Stanley must shore up internal systems and resubmit plans for managing capital by Dec. 29, the Fed said Wednesday. Examiners again failed U.S. units of Deutsche Bank AG and Banco Santander SA, saying they suffer from "broad and substantial weaknesses" in how they manage capital. And one regional lender, M&T Bank Corp., passed only after adjusting its plan for shareholder payouts.
"Morgan Stanley exhibited material weaknesses in its capital planning," the Fed wrote, listing deficiencies in how the firm designs specific scenarios, shortcomings in its modeling practices and related governance and control issues. "These weaknesses warrant further near-term attention but do not undermine the quantitative results."
The annual review is a cornerstone of the Fed's strategy to prevent a repeat of the 2008 financial crisis and taxpayer-funded bailouts by forcing the largest banks to bolster their operations with more capital. Wednesday's results mark this year's second and final round, determining whether firms can withstand losses and still pay dividends, buy back stock or make acquisitions.
The Fed's findings unleashed a flurry of announcements from banks, with many saying they'll significantly boost shareholder payouts.
Morgan Stanley said its quarterly dividend will increase 33 percent to 20 cents a share, or 2 cents more than estimated, and the company plans to repurchase as much as $3.5 billion of stock in the coming four quarters. The firm is committed to addressing the Fed's concerns and can meet examiners' requirements, Chief Executive Officer James Gorman said in a statement.
That's "a really healthy buyback," said Devin Ryan, an analyst with JMP Securities. "It's not ideal to have the asterisk, but it is a strong buyback approval and I think investors will look past the fact that they have to resubmit."
JPMorgan Chase & Co., the biggest U.S. bank by assets, kept its dividend at 48 cents and said it aims to repurchase $10.6 billion of stock, up from the $6.4 billion it announced last year. Citigroup Inc. said its dividend will more than triple to 16 cents — a penny more than estimated — while it buys back $8.6 billion of shares.
Changing Plans
Altogether, firms passing the tests planned to pay out about 65 percent of their projected earnings over the coming four quarters, a senior Fed official told journalists on a conference call Wednesday.
Last week, the Fed said all 33 banks subject to the tests have enough capital to absorb losses during a sharp and prolonged economic downturn, the second straight year all firms cleared the exams' first stage. That review, which didn't factor in capital plans, showed Morgan Stanley trailing the rest of Wall Street in a key measure of capital. The firm's projected 4.9 percent leverage ratio tied for last place and fell within a percentage point of the 4 percent regulatory minimum.
Following those results, firms can modify their capital plans to ensure they don't plan to pay out so much capital that it pushes their ratios below regulatory minimums. Regulators don't hold it against companies if their original plans are so aggressive that they're forced to resubmit, a senior Fed official said last week. Buffalo, New York-based M&T Bank was the only firm to do so this year.
Coming into this week, Bank of America Corp. faced what some analysts considered the most pressure to show that it could overcome stumbles in the past two years. The Fed had put the Charlotte, North Carolina-based lender on notice that it needed to get better this year, and CEO Brian Moynihan responded by allocating more than $100 million to overhaul controls. He also promoted veteran human-resources executive Andrea Smith to chief administrative officer, overseeing the stress-test submission.
