Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Ask and you shall receive -- if your capital cushion is sufficient. At least, that's the major takeaway after the Federal Reserve gave an all-important green light to 34 large banks in the U.S. with plans to pay dividends and buy back shares. 

As I'd projected, a payout bonanza is in store: Banks are set to pay out roughly 100 percent of their expected earnings over the next four quarters, a sizable step up from 65 percent last year, according to a senior Fed official. That includes Morgan Stanley and Goldman Sachs Group Inc., which both only just scraped past the central bank's prescribed minimum supplementary leverage ratio. Even Wells Fargo & Co., which was considered at risk of failing this second, quantitative part of the stress tests because of its retail-sales practices scandal, sailed through.

There was one wrinkle: Capital One Financial Corp., the $40 billion bank best known for its credit cards, received only conditional approval, meaning it'll have to resubmit its capital plan in the next six months. That's in part due to the Fed's conclusion that credit-card businesses would significantly suffer in its hypothetical recession scenario: 

Risky Business(es)
In this year's severely adverse scenario, the largest projected losses were in credit cards and commercial and industrial loans
Source: Federal Reserve

Also, Capital One and American Express Co. adjusted their payout plans lower after receiving results from the first portion of the stress tests last week. They were the only financial firms to have to resort to using a "mulligan" -- named after the golf term for taking a second tee shot after flubbing the first.

Sound the Alarm
Source: Federal Reserve

It's a little surprising to me that Discover Financial Services, which actually had larger projected losses than its two larger card-issuing rivals, didn't also have to use a mulligan. That outcome suggests its management perhaps wasn't quite as aggressive in its initial ask. Still, there's nothing wrong with the fact that Capital One and American Express attempted to push the envelope to begin with, knowing that the safety net of a second-attempt exists. 

Odd One Out
The largest U.S. lenders broadly met or beat Wall Street's expectations with generous payout plans that should in turn improve their own profitabiility ratios and justify potentially richer valuations. The exception was Capital One, the only bank that has to resubmit its plan.
Source: Bloomberg, Company Filings, KBW
*Goldman does not provide payout guidance

Separately, the Fed's approval of Bank of America's payout plans has solidified what we already knew: Warren Buffett is going to make a killing on his investment in the Charlotte, North Carolina-based lender. The Brian Moynihan-led bank's dividend hike means its common shares will pay more than the annual bounty which Berkshire has been earning on its preferred shares. If Buffett keeps to his word, Berkshire will soon exchange that stake for common shares, becoming the lender's biggest shareholder.   

Party Time
Shares in the biggest banks are rallying after hours following the Fed's approval of capital return plans that direct billions of dollars back to shareholders
Source: Bloomberg

In the Oracle of Omaha's words, good things happen for shareholders "when a company grows and outstanding shares shrink." For banks, growth is proving rather elusive, but at least --- with the help of the Fed -- they're able to take care of the second part of that statement.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net