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Market Update

6 Takeaways From the Fed's Bank Review

The CCAR revealed concerns about several major banks' capital plans, including those at B of A and Citigroup, which likely will discourage shareholders in the near term.

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The Federal Reserve announced March 26 that it has approved the capital plans of 25 banks participating in the Comprehensive Capital Analysis and Review, but objected to five. Four objections ( Citigroup (C),  HSBC North America (HSBC),  RBS Citizens (RBS), and  Santander USA (SAN)) were over qualitative concerns, while one ( Zions Bancorporation (ZION)) was because it failed to meet the minimum post-stress test Tier 1 common ratio.  Bank of America's (BAC) and  Goldman Sachs Group's (GS) plans were approved after they submitted adjusted capital plans. We do not anticipate changing our fair value estimates or moat ratings for any of the banks, but we think there are several key takeaways from the CCAR results.

First, somewhat surprisingly, in our view, Citigroup's capital plan was rejected. Although Citigroup would maintain an adequate Tier 1 common ratio of at least 6.5% in a severely adverse case--according to the Federal Reserve's estimates--its plan was rejected on a qualitative basis. Regulators cited "considerable progress" at Citigroup but were apparently still concerned with the company's internal stress testing, particularly related to its international operations. Citigroup will be forced to resubmit its capital plan, and given that there were "a number of deficiencies" in planning practices, it appears that shareholders won't see major increases in dividends or repurchases until next year.

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Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.