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Former CCAR banks write the playbook for trapped capital return

Three banks released from stringent stress testing could herald what capital return might look like for other superregional banks.

Regulators dropped Zions Bancorp., Comerica Inc. and CIT Group Inc. from the 2018 rounds of stress testing following the passage of congressional regulatory reform. The move removes the cap on their capital return, allowing the banks to pursue normalized capital levels after years of retaining earnings. Their actions in subsequent quarters could create a playbook for other banks that could receive similar relief in the future.

More institutions could soon find themselves in a similar position. Regulators have the discretion to relieve banks with $100 billion and $250 billion in assets of enhanced supervision, including State Street Corp., BB&T Corp., SunTrust Banks Inc., American Express Co., Ally Financial Inc., Citizens Financial Group Inc., Fifth Third Bancorp, KeyCorp, Northern Trust Corp., Regions Financial Corp., M&T Bank Corp., Huntington Bancshares Inc. and Discover Financial Services.

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These institutions may cease Comprehensive Capital Analysis and Review submissions within the next 18 months, giving them some time to consider what their normalized capital levels might look like and evaluate the market's reaction to the first three banks. They could return collectively $46.01 billion to shareholders if they chose to lower their Tier 1 common capital ratio to the Basel III minimum of 7%, according to an S&P Global Market Intelligence analysis.

"[Banks are] going to be able to push the envelope a little forward toward their regulatory minimums on their capital ratio and therefore be more aggressive in how they buy back stock or raise dividends," said Piper Jaffray analyst Kevin Barker, who covers Zions and believes every bank with less than $250 billion might be exempt from CCAR next year. "You're going to see an increasing amount of leverage for regional banks."

The first three banks have already announced their initial rounds of capital actions, with Zions and Comerica each announcing only one quarter of share repurchases. It is difficult to tell how the one-quarter's worth of capital actions would have compared to a typical CCAR announcement of four quarters. However, Keefe Bruyette & Woods analyst Brian Klock, who covers all three banks, modeled a $1.1 billion return from Comerica over four quarters, and said he feels "pretty good" that the bank announced about $600 million in capital actions in one quarter.

Similarly aggressive returns could come in the future. Zion's Chairman and CEO Harris Simmons said during the second-quarter earnings call that the bank intends to ramp up its payout ratio in hopes of moving the banks' CET1 ratio to a level slightly above its peer median — around 10.5%. Comerica Chairman and CEO Ralph Babb Jr. said the bank's second-quarter CET1 ratio of 11.89% was "pretty high" during the bank's earnings call.

If the three initial banks chose to lower their Tier 1 common capital ratio to the Basel III minimum of 7%, they could collectively distribute $7.9 billion in capital, according to an S&P Global Market Intelligence analysis.

Removing more institutions from CCAR could also remove the regulatory stigma around M&A as more banks are free to deploy built-up capital levels. That could mean more deals for superregional buyers.

"The outlook for the large regionals, in my opinion, should be more M&A because finally we do have more regulatory relief," Klock said. "The CCAR program has been really restrictive and punitive to banks that do acquisitions. … Now, banks don't have to worry about that hit and penalty when they go through CCAR. It makes it easier to do a deal when they can avoid that part of it."

Despite the relief, executives on second-quarter conference calls pledged to maintain sound risk management practices. CIT CFO John Fawcett said the bank's framework will be subjected to regulatory supervision processes and the bank will submit prudent capital return requests.

"I think a lot of people are under the impression that there's open season on capital, but the reality is that CCAR may be gone, but capital planning … remains alive and well. It's still subject to supervisory oversight," he said during the bank's second-quarter earnings call. "We expect to continue to work very closely with the Federal Reserve in terms of what our ability is to return capital and the pacing and timing at which that would happen."

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To read an article on the release of the 2018 Dodd-Frank Act stress test results, click here.

Click here to access a template with stress test results and supplemental data for the participating bank holding companies.

Click here to access a template of the Federal Reserve-run and the company-run 2018 Dodd-Frank Act stress-test results for the participating bank holding companies.