Yesterday, MetLife Inc. announced that the Federal Reserve (Fed) has extended the deadline for it to submit its comprehensive capital plan to June 30 now, after it missed the third consecutive deadline last week. The company filed an 8-K to the Securities Exchange Commission (SEC) regarding the extension.
MetLife failed to pass the annual capital stress-test of the Fed, both in October 2011 and in March 2012, given its bank holding status amid a concerned capital position in times of contingencies. The strict oversight from the Fed has even barred the company’s capital plan of authorizing a stock repurchase program worth $2 billion and hiking its dividend to $1.10 per share from the current 74 cents per share. Yet, the Fed has asked MetLife to submit a refurbished capital plan by the end of June this year, after it failed to submit a fresh capital plan as scheduled on January 5, before which it missed the deadlines in September and June last year.
The Fed is concerned about the size and scale of the company’s bank operations and has been closely and strictly supervising MetLife. This also explains the company’s rapid divestment or shut down of most of its banking operations. While MetLife has exited or shed most its banking operations, its $7 billion deal with GE Capital – the financial services unit of General Electric Co. , which was announced in December 2011, is yet to reach the finishing line.
Previously, the deal was expected to be closed by the first half of 2012 but complications in achieving regulatory approvals from Federal Deposit Insurance Corp. (FDIC) deterred it. Hence, in September 2012, the long pending deal was amended and simplified, whereby, GE Capital Retail Bank, instead of GE Capital Bank, will now buy MetLife’s bank deposits.
Transacting through GE Capital Retail Bank will make GE Capital less reliant on commercial paper and bond sales, while the fact that it comes under the regulatory purview of the Office of the Comptroller of the Currency (OCC), cleared the regulatory snags for the successful completion of the deal. Thus, the companies will no longer require the approval from FDIC.
Consequently, last month MetLife received an approval from the Office of the Comptroller of the Currency for its long pending deal. However, its culmination of the long overdue deal is yet to be scheduled.
Overall, we believe that another rejection from the Fed in the future could gravely raise the risk of rating downgrades. The ongoing regulatory challenges and risk of being acknowledged as a systemically important financial institution could again put MetLife under the Fed’s supervision and pose hindrances in the completion of the target of repurchasing shares worth about $8 billion from 2014–2016. Meanwhile, management is also considering withholding share buybacks in 2013, which may further dampen investors’ confidence.
Moreover, the recently faltered earnings guidance for the fourth quarter of 2012 and 2013, given the inflationary pressure and an extended low interest rate scenario across economies, raise concerns over MetLife’s growth prospects. This is also validated by the Zacks Rank #4 (Sell) on the stock.