Failing any portion of the Federal Reserve’s stress test is bad news for a bank holding company.
But, now, with activist investors flush with cash — and markets still chasing new all-time highs — the banks that didn’t pass the second portion of the stress tests, announced late Wednesday, are in for more bad news for their stock and their staff.
US banks — some of which stumbled in prior stress tests — performed better this time around.
However, the US units of Deutsche Bank and Santander both flunked the second portion of the test. For both banks, that could mean hard times ahead, and not just because they will likely be prevented from cutting potential dividends to their parent companies, in Europe.
Soon after the Fed’s announcement, the banks were eager to beat back bad news. Deutsche Bank said, in a release:
“Today, the Fed announced that it objected to the [Deutsche Bank] capital plan for qualitative reasons, which did not include any planned dividend or share repurchases. Deutsche Bank is committed to strengthening and enhancing its capital planning process.”
First, they should expect slumping share prices, as the rejection of management planning and strategy means not just that they’re headed back to the drawing board for upgrades.
Some managers may be fearing for their jobs with activists lurking
Next, the same managers and directors that didn’t pass the Fed’s smell test might be fearing for their jobs. Activist investors ratcheted up bolder campaigns last year, and already in the financial services sector, some companies have heard from hedge funds displeased with performance. One bank being simultaneously subjected to the Federal Reserve and an activist campaign is Bank of New York Mellon Corp., which Tuesday found itself under pressure from investor Marcato Capital Management to replace its CEO.
Another financial services firm, American Capital, found itself under pressure from Orange Capital, an activist, which argued earlier this month that the target was not adequately assessing risk and should take on buybacks (American Capital is not subject to the same Fed examination as Bank of New York Mellon).
Based on today’s results, some are anticipating activists to initiate new calls for management changes at other perceived under-performers.
“You can bet activist investors will be poring over today’s results to see what banks could be vulnerable to a shake up,” said Ryan Mendy, COO of The Edge Consulting Group, an equity research firm that focuses on spinoffs and special situations. “BNY Mellon is not the first, we expect to see activism pick up in the sector.”
Even the banks that passed may not be safe from activists’ glare
Conversely, banks that successfully passed both the Comprehensive Capital Analysis and Review and the Dodd-Frank Act Stress Test portions of the Federal Reserve’s examination and analysis, their success will be viewed by investors as a validation of managers’ and directors’ plans and preparation. For those with plans to cut the biggest dividends, like Goldman Sachs, this could mean a short-term run-up in share price as investors double-down on successful banks.
One source speculated that, despite US banks’ relative success this go-round, American bank holding companies may still see pressure from activists, to increase dividends or bump up buybacks.
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