Top Banks All Exceed Stress Test Conditions

The U.S. financial system is well positioned for round 2 of regulators' annual stress tests — meaning possible dividend hikes and stock buybacks — after all 31 of the largest banks cleared required capital levels in round 1 on Thursday.

The banks' combined Tier 1 common capital ratio, which gauges high-quality capital as a percentage of risk-weighted assets, was 8.2% in a hypothetical recession scenario vs. the 5% minimum allowance.

And for the first time since the tests began in 2009, all the banks that were tested also met the Fed's capital requirements.

"For the most part, the banking system is doing a really good job raising capital," said Ernest Patrikis, a partner at the law firm of White & Case and a former New York Fed official. "It's going in the right direction.

Focus Shifts To Round 2, Citi

Citigroup (NYSE:C), which reported a capital ratio of 8.2%, failed the Fed's stress test in two out of the last three years. The stock's 0.2% dip in late trading Thursday suggested that the latest numbers warranted caution.

While the 8.2% capital ratio matched the industry average, its Tier 1 leverage ratio, a measure of high-quality capital vs. all assets, was 4.6%. That's just above the 4% Fed minimum and was among the lowest of the 31 banks tested.

Last year, the Fed denied the New York-based bank's stock buyback and dividend boost plans. It also criticized Citi's expansive operations.

As a result, Citi has sought to slim down. This week, it announced the sale of its OneMain Financial unit for personal loans to Springleaf Holdings (LEAF) for $4.25 billion in cash.

And last October, Citi said that it will pull its retail banking business out of 11 markets — mostly in Central and South America — as well as leave the consumer banking markets of the Czech Republic, Japan, Egypt, Hungary and Guam.

Bank of America Leads Rally

Citi investors will find out if those efforts were enough on Wednesday, when the Fed releases second-round results that determine whether banks' capital levels are still sufficient after their requested share buybacks and dividends.

Among the biggest of the big banks, Bank of America (BAC) got the most positive response. Shares climbed 2% after hours, after the Fed said its Tier 1 common capital ratio was 7.1%.

JPMorgan Chase (JPM), the nation's largest bank, came in at 6.5%, and shares edged up 0.4%. Wells Fargo (WFC) posted a 7.5% Tier 1 number, and shares changed little.

But Zions Bancorporation's (ZION) capital ratio of 5.1% just barely beat the Fed's minimum requirement, sending shares down 1.5%. Meanwhile, investment banks Goldman Sachs (GS) and Morgan Stanley (MS) posted numbers of 6.3% and 6.2% respectively, and their shares slid 1.1% and 0.9%.

For the second straight year, U.S. units of foreign banks were subjected to the annual exam. Deutsche Bank (DB) and Banco Santander (SAN) were expected to struggle but ended up passing. Indeed, Deutsche Bank boasted a Tier 1 common capital ratio of 34.7%. Shares rose 0.2% late.