AXP American Express Company

By Robin Sidel 

American Express Co. has the capital to keep lending in a severe economic downturn, the Federal Reserve calculated Thursday in the first stage of its annual stress tests, paving the way for the credit-card company to set a dividend increase and share buyback plan.

AmEx said the plan it submitted to the Fed calls for increasing the quarterly dividend by 10% to 32 cents, starting in the third quarter and subject to board approval.

It also said it plans to repurchase up to $3.3 billion of common shares over the next year. The move will enable to company to buy back up to $4.4 billion in common shares this year, including $1.7 billion of expected buybacks during the current quarter and up to an additional $1.7 billion in the first half of 2017.

New York-based AmEx has suffered a share of strategic difficulties over the past year, including the loss of its longtime co-brand card with Costco Wholesale Corp., but the card company has long been considered to be well-capitalized.

At the low point of a hypothetical recession, AmEx's common equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, was 11.4%, exceeding the 4.5% level the Fed views as a minimum, the central bank estimated.

AmEx's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, was 10.9%, exceeding a 4% minimum.

The stress tests simulate a world-wide recession. The results were under the Fed's "severely adverse" scenario of financial stress, which this year includes 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.

The results will factor into the Fed's decision next week about whether to approve the bank's plan for rewarding shareholders with dividends or potential share buybacks. Banks whose capital ratios dropped close to minimum levels may choose to scale back their dividend or buyback plans before the Fed announces its final decision Wednesday. That day the banks can choose to announce whether they are raising their dividends or buying back more shares, important for enhancing shareholder returns.

Separately, Discover Financial Services said the Fed also had no objections to its capital plan, which calls for an increase in the company's quarterly dividend to 30 cents from 28 cents and share repurchases of up to $1.95 billion over the next year.

Write to Robin Sidel at robin.sidel@wsj.com

(END) Dow Jones Newswires

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

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