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Winners & Losers From Fed's Second Round Stress Test Results

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The S&P 500 financials sector rebounded nearly 1% on Jun 28, breaking its 13-day slump. Shares of all major banks jumped after the Fed announced the results of the final leg of the annual stress-test exercise, known as Comprehensive Capital Analysis and Review (CCAR). The Fed gave an OK to 32 of the 35 biggest banks in the United States that hold 80% of the total assets in the U.S. financial system, to raise their dividends and buy back shares.

Interestingly, despite a tougher stress test, the largest U.S. banks were widely expected to pay out more than what they earn for the first time since the economic crisis. However, two of Wall Street’s biggest banks, The Goldman Sachs Group, Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report) , failed two of the qualitative stress tests run by the Fed on banks’ capital plans.

Consequently, the Fed asked Goldman Sachs and Morgan Stanley to maintain their capital distribution at roughly last year’s level. Moreover, the U.S. arm of Deutsche Bank, Deutsche Bank Aktiengesellschaft (DB - Free Report) , failed the stress test, with the Fed rejecting its capital plan.

Banks to Pay Higher Dividends

Most of the major U.S. banks announced their dividend payout and share buyback plans after results from the second and final of stress test were announced. Despite a few stumbles in the test, the big banks are expected to pay $170 billion in combined dividends for the coming four quarters, as expected by analysts earlier. This is nearly $30 billion more than in the previous 12 months.

The country’s four major banks, Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo &Company (WFC - Free Report) and Citigroup, Inc. (C - Free Report) will offer more than $110 billion through dividends payouts and share buyback. Post stress test results, as many as 20 banks announced their share buyback and dividend payout plans for the next four quarters.

Bank Stocks Rebound

Almost a decade after the recession, profits of banks are steadily rising and they are lending more freely. This had made investors hopeful that banks would be paying out higher dividends this time. This saw bank stocks rebounding, with the S&P 500 Financials Select Sector SPDR (XLF) gaining 0.9%.

JP Morgan hinted at a 43% increase in its quarterly dividend and buy back of $20.7 billion in shares, while Wells Fargo will increase its quarterly dividend to 43 cents from 39 cents. American Express Company (AXP - Free Report) announced that it will increase its dividend by 11% and buy back $3.4 billion worth of shares.

This saw shares of JPMorgan Chase and Well Fargo increase 1.6% and 0.7%, respectively. Shares of Bank of America and Citigroup jumped 1.5% and 2.2%, respectively. The robust performance by banks stocks saw the KBW Nasdaq Bank Index increasing 0.6% on Thursday. 

Goldman Sachs, Morgan Stanley Falter

The Fed forced Goldman Sachs and Morgan Stanley to maintain their capital distribution to roughly last year’s level after the two major lenders failed to pass two important parts of the qualitative stress tests. According to results, both Goldman Sachs and Morgan Stanley had higher leverage than Fed’s requirement.

However, the banks were given conditional no-objections to their subdued capital plans. Interestingly, Morgan Stanley and Goldman Sachs had last week said that they won’t return more than $6.8 billion and $6.3 billion, respectively, in capital in the year starting in third quarter.

Both banks raised their dividend by 5 cents each. The figures are certainly disappointing, as both banks last week had hinted that they were confident of returning more capital to their shareholders than the figures of regulators suggested. However, shares of both Goldman Sachs and Morgan Stanley jumped 1.5% and 2.3%, respectively. Goldman Sachs has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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