Deutsche Bank Gets a Win as Fed Unleashes Payouts for Banks

(Bloomberg) -- Titans of the U.S. banking industry said they will pump out more cash to shareholders after all 18 lenders passed the Federal Reserve’s annual stress tests. The results were a particular win for Deutsche Bank AG after it repeatedly failed past exams.

A dozen of the nation’s largest lenders said they will boost payouts through dividends and stock buybacks 18% to more than $173 billion, a record for the group. Shares of Deutsche Bank gained in Frankfurt, while U.S. lenders including JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. rose more than 2.5% in New York.

The windfall for shareholders was even richer than the $150 billion foreseen by analysts thanks to the leeway the Fed granted firms to disburse their record profits. A decade after the annual tests were introduced, the exercise no longer appears to invoke as much anxiety for the industry after executives built up capital and gained experience navigating the exam.

“It’s really a good year for the big banks,” said Adam Gilbert, head of the financial-services advisory practice at PricewaterhouseCoopers. “It’s a vote of confidence from the Fed, including for some of the foreign banks which didn’t have it before. We’re seeing increases in payouts from most of them, reflecting the strong capital positions they’re in.”

Overall, the Fed said the review showed big banks are resilient and managing capital carefully. Officials said the approved payouts will slightly exceed the banks’ projected profits for the next four quarters.

Still, the increase this year is smaller than in the past two years, when total dividends and buybacks rose about 30% each time.

In passing, Deutsche Bank’s U.S. arm defied analysts’ predictions and scored a much-needed victory for Chief Executive Officer Christian Sewing, who took over the company a year ago and is struggling to turn it around.

The Fed’s endorsement of the bank’s internal oversight -- after subsidiaries failed three times in recent years -- shows he’s making progress in addressing a history of lax controls and misconduct, which have fueled billions of dollars in legal costs and taken a toll on the balance sheet. Last year, the Fed faulted the unit for “widespread and critical deficiencies” in capital-planning abilities.

Deutsche Bank rose as much as 4.1% in Frankfurt trading and was up 2.7% to 6.79 euros as of 3:32 p.m. That cuts this year’s decline to 2.6%. In New York, Bank of America gained 2.9%, JPMorgan advanced 2.7% and Goldman Sachs was up 2.7%.

‘Huge Step’

This week’s win for Deutsche Bank comes at a crucial moment, as Sewing develops another turnaround plan, potentially including deep cuts to U.S. operations. He has repeatedly said the bank remains committed to having a presence in America so that it can serve as an alternative to U.S. investment banks for European businesses. Yet some investors and regulators have criticized the firm’s exposure there.

“Achieving success here was one of the key goals we set a year ago,” Sewing said in a memo to employees. “And it is a huge step forward for our business in the U.S. and globally. A strong operating platform in the Americas is essential to our clients.”

The bank devoted significant resources to its capital-planning process and stepped up how it’s been handling some supervisory issues the Fed raised with the firm, a senior Fed official said in a briefing with reporters. The test is only part of the regulator’s oversight of Deutsche Bank’s U.S. operations, looking at capital and capital planning, and the Fed won’t be complacent about the German lender, the official said.

Two firms -- JPMorgan and Capital One Financial Corp. -- passed after tempering their initial proposals to pay out capital. And Credit Suisse Group AG’s U.S. arm passed on the condition it improves its ability to estimate trading losses in a downturn. The company must address the weaknesses by Oct. 27.

Credit Suisse in a statement on Friday acknowledged the Fed’s concerns and said that it expects to address them before the deadline.

JPMorgan scaled back its initial proposal for payouts a second straight year after the Fed said the plan could leave the bank just below regulatory thresholds in a hypothetical financial shock. Capital One fell short after the Fed projected steeper losses on credit-card portfolios in a severely stressed scenario. Still, both lenders passed after making adjustments.

“We like the bank managements’ willingness to ask for more capital return, and we see good progress in the Fed’s process,” Credit Suisse analysts led by Susan Katzke wrote in a note Friday. “Bank of America, Goldman Sachs, and JPMorgan were approved for a gross capital payout at least 20% above our forecast.”

The tests have become the most important tool for regulating the U.S. financial industry since the 2008 credit crisis showed many firms were lavishing profits on investors and retaining too little capital to absorb losses in an emergency. This is only the second time all banks passed since the reviews began in 2009. The last time it happened was 2017, when the U.S. units of major overseas lenders weren’t subjected to the qualitative portion of the test.

Capital Markets

This year’s assessment was easier on capital-markets businesses. That was a break for Goldman Sachs and Morgan Stanley, which both fared well in an initial round last week estimating the impact of an economic shock if banks maintained previous payouts. Last year, the pair were restrained from expanding payouts.

Deutsche Bank previously struggled with the qualitative portion of the stress test -- a more subjective review that looks at areas such as risk management, data-collection capabilities and capital planning. Past failures have prevented it from repatriating profits to its parent company, leaving its U.S. operations with more than enough capital to pass the quantitative side of the test.

The bank clearly took a conservative approach, as test results indicated its plan didn’t include moving any capital out of the U.S. unit despite having billions more than would be required to pass.

The bank still faces multiple investigations in the U.S. and in Europe over issues including suspected lapses in its anti-money-laundering controls.

This was the smallest group of banks the Fed has tested. After Congress passed a law last year ordering less-strict treatment of smaller lenders, the central bank eased the burden on a dozen regional U.S. companies and half a dozen smaller foreign ones, which are now tested every other year and weren’t included in this year’s exercise.

--With assistance from Steven Arons, Ryan Best and Elizabeth Rembert.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, David Scheer, Steve Dickson

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