Capital One this week announced plans to buy back up to $2.5 billion worth of its stock after receiving a clean bill of health from the Federal Reserve.
The McLean-based bank said it will return more than $3 billion to investors in the form of stock repurchases and dividends of 30 cents per share, exceeding analysts’ expectations.
“It’s a positive signal to investors,” said Sameer Gokhale, a banking analyst at Janney Capital Markets. “They were one of the few banks that had a significant positive surprise.”
Among the nation’s five largest banks, all but Citigroup passed the Fed’s 2014 Comprehensive Capital Analysis and Review. The idea behind the so-called “stress test” is to make sure banks have enough capital on hand to weather a financial crisis.
The banks that were deemed to be in good shape were allowed to reward shareholders with dividends and stock buybacks. JPMorgan Chase received approval to repurchase up to $6.5 billion in stock, while Bank of America and Morgan Stanley can buy back $4 billion and $1 billion worth of shares, respectively.
For Capital One, the approval comes after a period of less-than-stellar profit growth. In its most recent quarter, the bank posted a 2.1 percent gain in profits as credit card fees and interest payments continued to wane. As of Dec. 31, the bank had $204.5 billion in deposits and $297 billion in total assets.
Gokhale said the bank has had to deal with credit losses in its “private label” business to provide credit card services in other merchants’ names. It also has experienced some runoff in the value of its mortgage portfolio.
“There are some moving parts there, but despite that they seem to have received a clean bill of health,” he said.
This year’s performance on the stress test, analysts say, bodes well for the company, which relies on its credit card business for much of its revenue. “It’s a significant improvement, especially compared to where Capital One was during the last two years of the stress test,” said David Darst, an analyst at Guggenheim Partners. “They have been sitting on the sidelines for the past two years.”
Last year, Capital One repurchased $1 billion worth of shares
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