By Pete Schroeder and Matt Scuffham
WASHINGTON/NEW YORK (Reuters) - Deutsche Bank's (DE:DBKGn) shares rose by as much as 4.8% on Friday after Germany's biggest bank passed an annual health check by the U.S. Federal Reserve, in a boost to its beleaguered Wall Street operations.
But the Federal Reserve placed conditions on the U.S. operations of Credit Suisse (S:CSGN) (N:CS) after identifying weaknesses in its capital planning, knocking shares in the Swiss bank as much as 1.1%
The tests assess whether it is safe for banks to implement their capital plans, including using extra capital for stock buybacks, dividends and other purposes beyond providing a cushion against losses. They are designed to avoid a repeat of the taxpayer bailouts of the 2007-2009 financial crisis.
Deutsche Bank , whose U.S. business has been plagued by litigation, underperformance and regulatory investigations, topped the German bluechip index <.GDAX> in Frankfurt after its U.S. shares were up as much as 6% in after-the-bell trading on Thursday following the Fed's news.
The German bank maintained a large presence on Wall Street after the 2007-2009 financial crisis, while Credit Suisse made big cuts. But Deutsche's efforts to compete with U.S. rivals have been hampered by litigation and regulatory investigations.
Deutsche Bank Chief Executive Christian Sewing, who is battling to turn the bank around, said the Fed's decision was "excellent news" in a memo to staff on its website.
"Achieving success here was one of the key goals we set a year ago. It is a huge step forward for our business in the U.S. and globally. A strong operating platform in the Americas is essential to our clients," he said.
The Fed approved the capital plans of the 16 others in this year's test, including the biggest U.S. banks such as JPMorgan Chase (N:JPM), Bank of America (N:BAC) and Citigroup (N:C).
JPMorgan, following the test results, announced plans to increase its quarterly dividend to 90 cents per share from 80 cents, starting in the third quarter, and buy back up to $29.4 billion of shares over the next year.
JPMorgan shares rose as much as 1.9% while Bank of America was up 1.8% and Citigroup advanced 1.5% after-the-bell.
JPMorgan was asked to resubmit its proposal after the Fed assessed its initial plan would result in it falling below the minimum capital it is required to hold to cope with a downturn.
Banks normally resubmit when they are pushing to return the maximum amount of capital possible to shareholders and overestimate what the Fed will allow them to do in their initial proposal, banking and regulatory sources say.
STRONG CAPITAL LEVELS
The Fed's stamp of approval gives Deutsche Bank a major boost as it works on a restructuring plan after it flunked the test in 2015, 2016 and 2018. Another failure would have further damaged confidence among clients and investors.
The stress test outcome means that Deutsche is now free to make payments to its German parent without approval from the Fed, a restriction imposed after its failure last year.
The Federal Reserve, meanwhile, ordered Credit Suisse to address weaknesses in its capital adequacy process by October, and restricted its capital distributions to last year's levels until the weaknesses are addressed.
The Fed said it had identified "weaknesses in the assumptions used by the firm to project stressed trading losses that raise concerns about the firm's capital adequacy and capital planning process." It gave no further detail.
Credit Suisse, in an emailed statement, acknowledged the concerns relayed by the Fed and said it expected to remediate the issues by the October deadline.
In Zurich, a spokesman said the test would not affect Credit Suisse's payout to shareholders.
The Fed said in a statement that the nation's largest banks all have strong capital levels and "virtually all" are meeting supervisory expectations for capital planning.
Deutsche's passing grade reflected the significant progress in addressing its weaknesses around capital planning, although some issues remain, a senior Fed official said.
Deutsche's Sewing told investors at the annual shareholders' meeting last month that the bank planned to make "tough cutbacks" at its investment bank to appease investors unhappy with its underperformance. Those plans are likely to see the bank's U.S. equities business shrunk to a skeleton operation, Reuters reported this month.
All 18 banks cleared the first portion of the Fed's annual stress test last week, showing they would easily have enough capital to keep lending during a severe economic downturn.
The second test was more rigorous, assessing whether it is safe for banks to implement their capital plans.