JPMorgan Chase & Co, Wells Fargo & Co and other major U.S. banks plan to boost their dividend payments after passing stress tests evaluated by the Federal Reserve.
The dividends, and announcements of share buybacks in some cases, signal that regulators view banks as being healthy enough to withstand the remaining uncertainties in the economy, after the banking system has been profitable for a year.
This is one of the final steps in terms of showing the redemption of the banks from 2008, said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel, which owns bank stocks.
While several banks raised their dividends, others have additional hurdles to clear in recovering from the financial crisis. SunTrust Banks Inc and Keycorp on Friday announced plans to repay their U.S. government bailout aid, and Goldman Sachs Group Inc said it will buy back $5 billion of preferred stock that it sold to Warren Buffett's Berkshire Hathaway Inc at the height of the crisis in 2008.
In this second round of stress tests, the Fed had the banks submit their own analyses of whether they could withstand adverse economic conditions. In 2009, the Fed played a much larger role in analyzing banks' capital.
The central bank said on Friday it was restricting dividend payments to 30 percent or less of the company's expected earnings -- a ratio well below the 50 percent level paid out during better times.
In the years leading up to the crisis, banks paid out billions of dollars to investors, both as dividends and share buybacks, even as the financial system began to look shaky.
The banks' payout announcements came minutes after the central bank said it would allow some of the 19 largest U.S. banks to use some of their massive capital cushions to buy back shares, repay capital to the government and boost dividend payments.
The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks' long-term access to capital, the central bank said in a statement.
Improvements in economic conditions and cash positions at the largest financial institutions have convinced the Fed that some of the largest banks can start to reduce capital cushions built up in response to the financial crisis.
Banks such as BB&T, BNY Mellon and U.S. Bancorp also announced plans on Friday to boost dividend payments, in the latest sign that the banking system is recovering.
Under the Dodd-Frank regulation law, large banks and other financial firms are required to conduct stress tests at least once a year.
Three of the 19 largest banks have yet to repay the U.S. bailout aid they took at the height of the financial crisis. Investors hailed plans by two of the three, SunTrust and Keycorp, to do so as another sign of the industry's recovery.
Atlanta-based SunTrust, the largest lender in the U.S. Troubled Asset Relief Program, and Cleveland-based Keycorp both said on Friday they would repay a combined $7.4 billion in TARP funds.
That's very good, said Marshall Front, chairman and chief investment officer at Front Barnett Associates in Chicago, who owns bank stocks.
It can't be viewed as anything but positive for them, and reflects trends for the banking sector in general, he said.
Regions Financial Corp, the last remaining TARP holdout in the group of 19, said the company did not propose any capital action in its regulatory review, and will repay TARP in a prudent manner, on shareholder-friendly terms.
TOUGH STRESS TESTS
The Fed started notifying the 19 largest banks, including Citigroup, Bank of America and Goldman Sachs, whether they passed the second round of stress tests and whether they have won approval to pay out dividends.
But the Fed left it to the banks to disclose individual results.
As part of this year's test, the central bank assessed banks' ability to repurchase shares and pay dividends while still maintaining adequate capital cushions in adverse economic conditions. Those conditions for 2011, for example, included an unemployment rate of 11 percent, a 1.5 percent decline in gross domestic product and a 27.8 percent drop in equity prices.
BB&T Chief Executive Kelly King said he found the second round of stress tests very similar to the exams conducted in 2009.
It was a very in-depth exam. I think, frankly, it was an accurate and reasonable assessment, based on the various scenarios the regulators outlined, King told Reuters.
European regulators are running through their own set of stress tests, which cover a much larger number of banks.
Investors have been eager for banks to restore quarterly payouts after they were either suspended, or slashed to as little as a penny a share, at the height of the 2007-2009 financial crisis.
According to the Fed, common equity increased by more than $300 billion at the big banks from the end of 2008 through 2010.
(Reporting by Rachelle Younglai in Washington and Maria Aspan in New York and Joe Rauch in Charlotte; Editing by Andrea Ricci, Tim Dobbyn and Richard Chang)