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Why Fed Asked Morgan Stanley to Resubmit Capital Plan
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The Federal Reserve has come out with the results of second and final round of annual stress test. Morgan Stanley (MS - Free Report) was the only U.S bank to stumble in the same, securing a conditional approval for its 2016 capital plan.
The Fed noted material weakness in Morgan Stanley’s capital planning process. These included shortcomings in how the company forms specific scenario as well as deficiencies in modelling process and governance & control issues. A Fed official commented “These weaknesses warrant further near-term attention but do not undermine the quantitative results.”
Morgan Stanley is required to resubmit an additional capital plan by Dec 29, 2016.
Notably, Morgan Stanley’s 2016 capital plan includes a 33% hike in dividend to 20 cents per share and share repurchase authorization of $3.5 billion for the four quarters beginning third quarter 2016. Further, the company intends to redeem other capital securities.
Morgan Stanley had not fared well in the first round of stress results, declared last week by the Fed. The company had trailed other Wall Street banks in a key measure of capital. Morgan Stanley along with BMO Financial had the weakest Tier 1 leverage ratio of 4.9% against the regulatory minimum of 4.0%.
Despite this conditional approval to the capital plan, investors cheered the outcome. Morgan Stanley was up nearly 1% in the after-market trading.
Further, among the 33 firms that were part of annual stress test, the Fed objected to the capital plans of the U.S. units of Deutsche Bank AG (DB - Free Report) and Banco Santander, S.A. citing “substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations”.
However, for Deutsche Bank and Banco Santander units, the Fed’s objection is nothing new. This is the second time for Deutsche Bank, while Banco Santander unit is facing this situation for the third time.
Notably, resubmission of capital plan is a costly process. Last year, Bank of America Corporation (BAC - Free Report) spent $100 million for the same, as the Fed had given conditional approval to its capital plan. In 2014, JPMorgan Chase & Co. (JPM - Free Report) and The Goldman Sachs Group, Inc. had faced similar issues.
Therefore, Morgan Stanley is likely to witness a rise in operating expenses in the upcoming quarters.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
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Why Fed Asked Morgan Stanley to Resubmit Capital Plan
The Federal Reserve has come out with the results of second and final round of annual stress test. Morgan Stanley (MS - Free Report) was the only U.S bank to stumble in the same, securing a conditional approval for its 2016 capital plan.
The Fed noted material weakness in Morgan Stanley’s capital planning process. These included shortcomings in how the company forms specific scenario as well as deficiencies in modelling process and governance & control issues. A Fed official commented “These weaknesses warrant further near-term attention but do not undermine the quantitative results.”
Morgan Stanley is required to resubmit an additional capital plan by Dec 29, 2016.
Notably, Morgan Stanley’s 2016 capital plan includes a 33% hike in dividend to 20 cents per share and share repurchase authorization of $3.5 billion for the four quarters beginning third quarter 2016. Further, the company intends to redeem other capital securities.
Morgan Stanley had not fared well in the first round of stress results, declared last week by the Fed. The company had trailed other Wall Street banks in a key measure of capital. Morgan Stanley along with BMO Financial had the weakest Tier 1 leverage ratio of 4.9% against the regulatory minimum of 4.0%.
Despite this conditional approval to the capital plan, investors cheered the outcome. Morgan Stanley was up nearly 1% in the after-market trading.
Further, among the 33 firms that were part of annual stress test, the Fed objected to the capital plans of the U.S. units of Deutsche Bank AG (DB - Free Report) and Banco Santander, S.A. citing “substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations”.
However, for Deutsche Bank and Banco Santander units, the Fed’s objection is nothing new. This is the second time for Deutsche Bank, while Banco Santander unit is facing this situation for the third time.
Notably, resubmission of capital plan is a costly process. Last year, Bank of America Corporation (BAC - Free Report) spent $100 million for the same, as the Fed had given conditional approval to its capital plan. In 2014, JPMorgan Chase & Co. (JPM - Free Report) and The Goldman Sachs Group, Inc. had faced similar issues.
Therefore, Morgan Stanley is likely to witness a rise in operating expenses in the upcoming quarters.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>