The largest U.S. banks are poised to return billions of dollars to investors after Federal Reserve stress tests showed planned dividends and stock buybacks wouldn’t leave them too weak to survive a harsh economic downturn.
Under the most severe test scenario, a recession with unemployment spiking to 10% and the Dow Jones Industrial Average falling by more than 50% to about 12,800, evaluators projected that the banks examined this year would still have higher capital reserves than they did in early 2009, at the height of the financial crisis.
Only 18 were evaluated, a product of Congress’ decision last year to grant a break to smaller financial institutions from some of the regulatory scrutiny established in the Dodd-Frank finance reform law that followed the crisis. Together, the firms hold about 70% of all banking assets, including mortgages, credit card portfolios and commercial loans, in the U.S.
“The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices,” Randal Quarles, the Fed’s vice chairman for supervision, said Thursday. “The results show that these firms and our financial system are resilient in normal times and under stress.”
While the Fed didn’t disclose the total payouts the banks requested, JPMorgan Chase analyst Vivek Juneja projected more than $119 billion from the 13 lenders his firm tracks, and Morgan Stanley analyst Betsy Graseck estimated a total of $143 billion from 11 of the firms.
The payouts will be made from July 1 through June 30, 2020, during which the U.S. presidential campaign will be heating up, and the Fed has indicated it may respond to indications of slowing economic growth by trimming U.S. interest rates.
On average, the banks are likely to spend 8% more than net earnings on dividends and share repurchases during the period, Goldman Sachs analyst Richard Ramsden predicted.
That compares with a median payout ratio of 73% for large banks as recently as three years ago and shows the progress lenders have made in meeting Federal Reserve expectations since the financial crisis and, consequently, returning some of the capital amassed during the past 11 years to investors.
“On the positive front, the banking industry has an excellent story to tell about how it is stronger and more solvent than at any point in modern times,” said Jaret Seiberg, an analyst with Cowen Washington Research Group. “Yet it also makes it harder to push back on why onerous regulatory or legislative policies are really that harmful, given how well the banks have performed under the Dodd-Frank regulatory regime.
Yearly stress tests began in 2010 as the government worked to prevent a repeat of the 2008 crisis, which forced Congress to spend billions in bailouts to keep lenders from collapsing after the failure of Lehman Brothers, the fourth-largest U.S. investment bank at the time. Its bankruptcy was the largest in U.S. history.
Some of the bailed-out lenders had raised their dividends before the crisis, leaving them with weakened reserves, even though defaults were surging in the $15 trillion U.S. mortgage market, and economists were warning that recession risks were rising.
Two of the firms evaluated this year, JPMorgan and Capital One, both adjusted initial payout plans after the stress tests dragged some of their capital levels below minimum requirements, Fed officials said. New York-based JPMorgan boosted its quarterly dividend 13% to 90 cents a share and said it would buy back up to $29.4 billion of its stock.
“We are pleased to have the capacity and flexibility to return excess capital to our shareholders,” CEO Jamie Dimon said in a statement. “We maintain a fortress balance sheet that provides the ability to withstand extreme stress.”
Bank of America, meanwhile, plans to return $37 billion to investors. The Charlotte, N.C.-based lender will boost its dividend 20% to 18 cents a share and buy up to $30.9 billion of its stock. New York-based Citigroup plans a 13% dividend increase, to 51 cents a share, and share repurchases of up to $17.1 billion.
The Fed made no objection to Wells Fargo’s plans to raise its dividend 13% to 51 cents a share and buy back up to $23.1 billion of its stock, despite speculation that three years of scandals might prove a hurdle for the San Francisco-based lender.
Wells Fargo has paid billions of dollars in fines over the past two years after complaints that its workers created millions of phony customer accounts, sold some auto-loan customers’ insurance they didn’t need, and overcharged mortgage borrowers, analysts say.
Credit Suisse’s payouts were capped at last year’s levels until the Swiss lender’s U.S. operations, the only parts the Fed evaluates, address concerns about capital planning, such as how they estimate potential trading losses.
