Fed Rejects BB&T's Capital Plan

In a shocking development, the Federal Reserve has rejected the capital plan of BB&T Corporation ( BBT - Analyst Report ) in spite of the latter’s Stress Test clearance. Neither the company nor the Fed has clearly disclosed the reasons for the rejection of the capital plan.

BB&T had announced a 15% dividend hike in January this year, and this will remain unaffected despite the recent disapproval of its capital plan. In addition, the Fed has not objected to BB&T's continued payment of preferred dividends for its outstanding classes of preferred stock. However, all its other strategies, including stock buybacks, have been put on hold until the company re-submits its plan.

Based on certain “qualitative” reasons, the Fed might have rejected the plan. These may include flawed corporate governance, unresolved supervisory issues, risk-management processes, unsatisfactory assumptions about the capital plan and a precarious capital distribution.

Further, the Fed has noted that in March, BB&T had re-calculated its risk-weighted assets (RWAs), which led to an increase in RWAs. Subsequently, it will result in lower capital ratio as compared with the Fed’s prediction. The Fed, which has been overtly cautious ever since the last financial meltdown, took no chance and rejected the plan.

BB&T is not the only firm whose plan was shelved. Ally Financial Inc. also had its capital plan rejected. It was the only bank that failed to meet the Fed’s minimum requirement of 5% Tier 1 common capital ratio to clear the stress test. Therefore, with 1.5% capital ratio, Ally remains unstable, struggling with troubled mortgages and other distressed businesses, and consequently witnessed Fed’s rejection.

However, the remaining 16 banks, including Wells Fargo & Company ( WFC - Analyst Report ) , The Bank of New York Mellon Corporation and U.S. Bancorp, have received approval for capital plans.

Though Wall Street biggies like The Goldman Sachs Group Inc. ( GS - Analyst Report ) and JPMorgan Chase & Co. ( JPM - Analyst Report ) received the Fed’s approval for the proposed capital plans, the banks will need to resubmit the plan by the end of the third quarter of 2013. These two banks have been asked to resubmit the capital plans due to the weaknesses recognized in the capital planning processes.

As BB&T is one of the most well capitalized banks, the rejection comes as a surprise. Moreover, this may act as a demoralizing factor for the investors.

BB&T currently holds a Zacks Rank #3 (Hold).