Deutsche Bank fails Fed stress test; Goldman, Morgan Stanley pass but can't boost dividends

Most of the largest U.S. banks received the Federal Reserve’s approval on Thursday to return cash to shareholders through stock buybacks and dividends.

But the U.S. unit of Deutsche Bank, the embattled German bank, failed to pass the second round of the Fed’s annual stress tests, preventing the company from increasing its payout. The failing grade likely won’t prevent Deutsche Bank from maintaining its dividend, but it will need to make changes to its U.S. business.

The Fed said the other 34 banks submitted acceptable capital return plans. However, Morgan Stanley and Goldman Sachs, which edged out passing grades in the first round of the stress tests last week, won’t be able to boost their dividends or share buybacks.

JPMorgan Chase, American Express, KeyCorp and M&T Bank passed the second leg after submitting more modest proposals for capital returns. The Fed will require State Street to “enhance the management and analysis of counterparty exposures” in a crisis, according to the company.

The banks will pay out 95% of their expected earnings for the coming year, according to The Wall Street Journal.

Randal Quarles, the Fed’s vice chairman for supervision, said the results of the stress tests “demonstrate that the largest banks have strong capital levels, and after making their approved capital distributions, would retain their ability to lend even in a severe recession.”

Financial institutions have improved their capital reserves to protect against potential losses in the future, allowing the banks to spend more on share buybacks and dividends in recent years.

Following the results of the stress tests, banks announced the details of their dividend and buyback plans.

Among them, JPMorgan Chase said it will increase its quarterly dividend to 80 cents a share, up from 56 cents, and begin a $20.7 billion share repurchase program in July. Wells Fargo’s dividend will climb to 43 cents a share from 39 cents, and the bank will buy back up to $24.5 billion in stock.

Ticker Security Last Change Change %
JPM JPMORGAN CHASE & CO. 185.29 -0.77 -0.41%
BAC BANK OF AMERICA CORP. 34.35 -0.17 -0.49%
WFC WELLS FARGO & CO. 55.06 -0.53 -0.95%
C CITIGROUP INC. 55.60 +0.11 +0.20%

Every bank passed the first round of the central bank’s annual stress tests last week, demonstrating they have enough capital to survive a severe economic downturn.

Goldman Sachs and Morgan Stanley passed the first round after their capital margins in a hypothetical collapse exceeded the Fed’s minimum by just a slim margin. Goldman Sachs disagreed with the Fed’s calculations, the Wall Street Journal reported. Morgan Stanley said the results “may not be indicative of the capital distributions that we will be permitted to make.”