Bank of America Corp shares on Wednesday hit their highest level in seven months after a Federal Reserve stress test affirmed one of the more troubled U.S. banks had made progress in improving its capital levels.

The second-largest U.S. bank had been expected to pass the review, but its conservative capital plan allowed it to contrast with other banks, notably Citigroup Inc , that had their proposals for dividend increases and share buybacks denied by the Fed.

Last year, the Fed rejected a modest dividend increase the bank had requested, embarrassing Chief Executive Brian Moynihan. This year, Bank of America said it wasn't asking to hike its penny-per-quarter payout or to buy back shares. Instead, it would continue to build capital as it works to absorb mortgage-related losses and meet new international standards.

Bank of America's performance in the stress test was adequate and without the drama of last year, said Gary Townsend, chief executive of Hill-Townsend Capital in Maryland, which invests in bank stocks.

For once, they read the body language of regulators and didn't push the envelope as Moynihan did last year, Townsend said.

The move gave the bank better capital ratios under the stress test than nine of 19 banks when counting proposed dividend increases and share buybacks. But it also left the bank out of another round of improved payouts to shareholders.

Higher quality banks such as JPMorgan Chase & Co , Wells Fargo & Co and U.S. Bancorp began to differentiate themselves from other banks with higher dividend yields and share repurchase plans, said Guggenheim Partners analyst Marty Mosby. JPMorgan, for example, on Tuesday got approval to boost its quarterly dividend to 30 cents per share from 25 cents, compared to Bank of America's 1 cent.

Still, Mosby noted conservative capital plans such as Bank of America's were better received by the Fed than more aggressive ones. Citigroup and SunTrust Banks Inc did not stay above the minimum capital threshold when including their plans for dividends and buybacks. Details of those rejected plans were not disclosed.

After showing it was able to pass the stress test, Bank of America could be in a position to ask for a modest dividend increase next year but no share buybacks, Mosby said. The bank needs to keep accumulating capital to meet so-called Basel III capital standards, which will start being phased in next year, he noted.

While banks have until 2019 to meet the new requirements, it's better to show they can get there pretty soon, he said.

Bank of America's shares climbed 4.1 percent to close at $8.84, while the KBW Bank Index rose 1.3 percent. For the year, the bank's shares are up about 59 percent, after falling 58 percent last year on concerns about the bank's capital.

Some of the numbers released by the Fed detail the challenges that still await Charlotte, North Carolina-based Bank of America. Of the 19 banks, the Fed expected Bank of America to lose the most before income taxes from the fourth quarter of 2011 to the fourth quarter of 2013 under the stress scenario: $51.3 billion. Citigroup fared the second worst, with a projected loss of $50.3 billion.

The Fed emphasized that its estimates were not forecasts of expected losses and that the hypothetical stress scenario, which included U.S. unemployment of 13 percent, was more adverse than expected.

Under the scenario, Bank of America was expected to experience loan losses equal to 8.3 percent of its average balances, compared to the average of 8.1 percent for the 19 banks. Its home-equity portfolio would experience losses of 15 percent, compared to 13.2 percent for all of the banks.

Bank of America showed progress in improving its capital levels, even though additional capital it built in the fourth quarter of 2011 was not counted. But the stress tests also highlighted its other major challenge: revenue.

Under the stress scenario, the Fed said Bank of America would have net revenue before loan-loss provisions of $40.1 billion, trailing JPMorgan ($59.3 billion), Wells Fargo ($53.3 billion) and Citigroup ($41.2 billion). The revenue figure, which also covers the fourth quarter of 2011 through the fourth quarter of 2013, includes expenses from investor requests to buy back soured mortgage loans and foreclosure costs, one of Bank of America's biggest troubles.

(Reporting By Rick Rothacker; Editing by Alwyn Scott and Bernard Orr)