U.S. bank shares rise on capital return plans after stress test

By Sinéad Carew

(Reuters) - Shares in the biggest U.S. banks rose on Friday after the Federal Reserve completed its annual stress test giving financial institutions the go-ahead for plans to return capital to investors through dividends and buybacks.

The S&P 500 bank sector index <.SPXBK> was last up 1.9 percent after touching its highest level in a week. Wells Fargo & Co (NYSE: WFC) led the pack with a 5.1 percent gain, and most of the index's other banks rose more than 1 percent.

Deutsche Bank AG's U.S. subsidiary was the only bank to fail due to "widespread and critical deficiencies" in its capital planning controls.

The Fed also placed conditions on three banks that passed the test.

Goldman Sachs Group Inc (NYSE: GS) and Morgan Stanley (NYSE: MS) cannot increase capital distributions and State Street Corp (NYSE: STT) must improve its counterparty risk management and analysis, the Fed said.

Aberdeen Standard Investments equity analyst Michael Cronin said the results were a modest positive for stocks in the sector, which has been pressured recently by concerns about a flattening yield curve.

"Overall things look OK. The big winner is probably Wells Fargo because there was a little concern about them going into CCAR. They also had a good size capital return," said Cronin.

The test results are "not really huge needle movers for estimates overall. At best you're up a couple of percent in annual estimates but nothing to move the group significantly," he said.

For a list of payout plans announced by banks:

Keefe Bruyette & Woods said payouts were below expectations for the majority of the 23 banks it covers, with the test tougher than it expected. The median gross payout ratio of 93 percent was up from 86 percent a year ago but below KBW's 101 percent expectation.

Four banks had payout ratios that exceeded KBW expectations by 10 percentage points or more, while 11 fell short of its estimates by 10 percentage points or more.

The payout ratio from M&T Bank Corp (NYSE: MTB), last up 2.4 percent, beat KBW's expectations by 31 percentage points while Suntrust Banks Inc (NYSE: STI), last up 1.9 percent, beat by 30 percentage points and KeyCorp (NYSE: KEY), up 2.4 percent, beat by 25 percentage points.

However, the payout from State Street Corp (NYSE: STT) was 36 percentage points below KBW's estimate while BB&T Corp (NYSE: BBT) undershot by 30 percentage points and PNC Financial (NYSE: PNC) and Bank of America Corp (NYSE: BAC) both came in 28 percentage points lower.

But even most banks that missed analyst payout estimates saw a bump in their shares, with State Street up 0.9 percent, BB&T gaining 1.5 percent and Bank of America rising 0.5 percent.

Goldman Sachs and Morgan Stanley shares were flat.

The broader S&P Financial index <.SPSY> was up 1.4 percent to its highest level since Monday. It had ended a record 13-day losing streak on Thursday.

(Reporting By Sinéad Carew; Editing by Meredith Mazzilli)

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