OREANDA-NEWS. Next month's capital plan submissions for the 2015 Comprehensive Capital Analysis and Review (CCAR) could highlight an increasing capital-flexibility divide among the 31 participating US banks, says Fitch Ratings.

Banks that did not pass last year's CCAR, or are new to the process, are likely to submit more conservative capital plans. Furthermore, banks subject to the Fed's recently proposed globally systemically important bank (G-SIB) buffers may begin to temper dividend increases in favor of share repurchases. Fitch expects more expansive capital plans, on the other hand, from those banks with relatively lower systemic importance, strong capital levels, and a clean CCAR track record.

Among the 13 banks that Fitch believes could submit relatively more conservative capital plans this year are Citigroup, HSBC North America Holdings, RBS Citizens, Santander Holdings USA and Zions Bancorp, the group that did not pass last year's CCAR, and the lone first-time participant in this year's process (Deutsche Bank Trust). Banks not passing last year's review want to avoid the reputational damage and shareholder backlash that would likely accompany failing CCAR two years in a row. Thus, they are more likely to submit relatively conservative capital requests to build in a buffer against uncertain Fed assumptions and increase their likelihood of passing.

Of the eight US G-SIBs (Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo), several may begin to tilt their capital requests towards share repurchases rather than dividend increases ahead of the 2019 effective date for the capital surcharge proposal. The optionality of share repurchases would provide additional capital flexibility in future years, relative to scheduled dividends.

The remaining 18 participating banks that don't fall under these categories are, in general, likely to submit more expansive initial capital plans given their strong capital levels, shareholder pressure for increased returns, and the flexibility afforded by the CCAR resubmission process. The large regional banks, the trust and processing banks, and the credit card banks are better positioned for incrementally higher capital requests.

Capital ratios continue to build for the largest US banks due to the constraints of stress testing, relatively modest balance sheet growth or deleveraging, and new regulatory capital rules. Fitch calculates that the average Common Equity Tier 1 ratio under Basel III (on a fully phased-in basis) for the 26 banks that disclosed this figure at year-end 2014 was a strong 10.6%, well above the 7% requirement for the majority of banks that are likely not subject to any systemically important capital surcharge.

A regulatory governor on returns of capital is positive for ratings as it provides additional capital protection for debt holders. But sustained excess capital levels can create incentives for banks to expand their risk appetites to increase equity returns. In addition, if capital is not permitted to be released due to qualitative concerns about the firm's risk management and reporting framework - this can pressure ratings no matter the absolute level of capital.

Regardless of banks' individual capital ambitions, the market perceives a regulatory bias against capital plans that imply a total payout ratio of greater than 100%. Thus, banks will look to find the capital request sweet spot that allows them to extract desired capital under the stress test without going below the regulatory capital floors or above the payout ceilings.

The Fed's annual evaluation of the capital sufficiency of the largest US banks kicks off with the announcement of Dodd-Frank Act Stress Test (DFAST) results on March 5, followed by CCAR results on March 11. DFAST assesses the sufficiency of banks' capital under a Fed-derived stress test, whereas CCAR overlays banks' proposed capital plans to this stress.