U.S. bank stocks surge as Fed unlocks ‘treasure chest’

The biggest U.S. banks added more than US$25 billion in market value after the Federal Reserve’s annual stress tests opened the way to surprisingly big increases in dividends and share buybacks.

Wells Fargo & Co. jumped 2.7 per cent while Citigroup Inc. advanced 2.8 per cent in New York trading Thursday. Regions Financial Corp. and KeyCorp also climbed as the KBW Bank Index rose to a threemonth high. Financials posted the biggest gain among sectors in the S&P 500 Index, which fell 0.9 per cent.

“The results came in well ahead of both our estimates and consensus estimates as the Fed allowed for a large step-up” in payouts to shareholders, Scott Valentin, an analyst at Compass Point Research & Trading LLC, said in a note titled “Fed Unlocks Treasure Chest of Capital Return.”

JPMorgan Chase & Co., Citigroup and Bank of America Corp. unveiled plans on Wednesday to boost payouts more than analysts had projected, after every lender passed the Fed tests for the first time since the central bank began the reviews in the wake of the 2008 financial crisis.

Capital One Financial Corp. slipped 1.8 per cent after it was the lone bank to stumble through the exam, garnering conditional approval to make payouts while it fixes “material weaknesses” in planning. The company reduced its buyback program for the next four quarters 30 per cent compared with the previous year’s total.

Lofty payouts made banks hot stocks until the financial crisis exposed many of them as too thinly capitalized. The companies unveiled plans Wednesday showing how they’re trying to generate investor interest — even as many still struggle to meet profitability targets and a few languish below book value.

“The sun is setting on the postcrisis balance sheet rehab,” Pri de Silva, an analyst at CreditSights Inc., said in a note. “These massive payouts and an improved earnings outlook reflecting higher rates should alleviate calls for breaking up the banks.”

The Fed’s projections also show regulators may have more leeway to ease rules after years of forcing companies to curtail risk-taking and beef up internal controls — demands that eroded revenue and fuelled cost increases.