Banks add $40 billion in value as Fed unlocks ‘treasure chest’

The biggest U.S. banks added more than $40 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 4.1 percent while Citigroup surged as much as 3.8 percent in New York trading Thursday. Regions Financial Corp. and KeyCorp also climbed as the KBW Bank Index rose the most since April.

“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, said in a note titled “Fed Unlocks Treasure Chest of Capital Return.”

JPMorgan Chase & Co., Citigroup and Bank of America 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 0.7 percent 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 percent compared to 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.

[AP FILE PHOTO] The Federal Reserve on Wednesday gave the green light to all 34 of the biggest banks in the U.S. to raise their dividends and buy back shares, judging their financial foundations sturdy enough to withstand a major economic downturn.