GS Goldman Sachs Group Inc

By Liz Hoffman 

The Federal Reserve approved Goldman Sachs Group Inc.'s capital plan in the regulator's annual stress test released Wednesday.

Goldman's plan was approved after the Fed found that the firm could keep lending in a severe economic downturn even while increasing its dividend and buying back stock. The approval clears the way for the Goldman to reward investors by returning capital.

The Wall Street firm said after the Fed findings were released that it plans to increase its dividend and buy back stock, but it didn't provide more details.

"We remain focused on managing our resources, growing our client franchise, and generating superior returns for our shareholders while remaining well capitalized," Chairman and Chief Executive Lloyd Blankfein said in a statement. Goldman's shares rose 1.4% after-hours as investors digested the results.

At the low point of a hypothetical recession, the Fed determined that Goldman's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 7.6%, above the 4.5% level the Fed views as a minimum. The new ratio, unlike the one reported last week by the Fed in a related test, takes into account the bank's proposed capital plan.

Goldman's Tier 1 leverage ratio would have reached as low as 5.8% in a hypothetical recession, above the 4% Fed minimum.

Since the last Fed stress test in 2015, Goldman has started to explore a build-out of its nascent consumer lending and deposit franchise. While the efforts aren't yet material to the overall results of the firm, they could eventually diversify the firm away from its traditional revenue base of investment banking, trading and investing.

The latest Federal Reserve test result incorporates quantitative factors assessed in data released by the Fed last week. These included a simulation of how the bank's capital buffers would hold up under a world-wide recession. The Fed's "severely adverse" scenario of financial stress this year included a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

This second part of the test also included a qualitative assessment by the Fed of a bank's capital-planning process and internal controls. The Fed has the ability to object to a bank's capital plan on either quantitative or qualitative grounds.

The Fed's Wednesday results are arguably the more important part of the stress-test process since it dictates how much capital will be returned to shareholders. Increased dividends and buybacks can help to bolster a bank's share price.

Goldman gets its first clean pass from the Fed following three years of qualified approvals. It took so-called "mulligans" in 2014 and 2015, the term for occasions when a bank's first request to return capital to shareholders didn't pass muster with regulators. And in 2013, Goldman got conditional approval for its capital plan but was required to address weaknesses identified by regulators.

The firm increased its quarterly dividend last year to 65 cents a share from 60 cents and has been an aggressive buyer of its own shares in recent years.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

June 29, 2016 18:18 ET (22:18 GMT)

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