Five of the largest US banks said on Friday they will return more money to shareholders after passing Federal Reserve stress tests earlier in the week. This is a sign of strength, widening the gap between the industry giants and smaller regional competitors.
JPMorgan Chase (JPM), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), and Citigroup (C) each announced plans to increase their quarterly dividends, with increases ranging from 2 cents to 25 cents. Goldman’s was the largest and Citigroup’s the smallest.
Many also referred to the results of its regulatory reviews, which the Fed released on Wednesday after assessing whether 23 institutions could weather a severe global recession with 10% unemployment and a 45% stock market plunge.
Shareholders were not allowed to withdraw cash from the banks until they received a pass grade.
Morgan Stanley CEO James Gorman said Friday that the results “demonstrate the resilience of our transformed business model.” Citigroup CEO Jane Fraser said they “demonstrate Citi’s financial resilience.” Goldman CEO David Solomon said, “We are pleased with the progress we have made in reducing the capital intensity of our business.”
Jamie Dimon, CEO of JPMorgan, which heads the country’s largest bank, said the tests showed banks were “resilient” and “continued to serve as a pillar of strength for the financial system and the broader economy.”
Bank of America (BAC), the country’s second-largest bank, made no announcement on Friday.
Jamie Dimon, CEO of JPMorgan Chase. (AP Photo/Andrew Harnik)
US bank stocks ended June with their best performance in months. The KBW Bank Index closed up more than 5% on Friday, while the KBW Regional Bank Index gained 3%.
No regional bank that passed the Fed’s test announced dividend increases on Friday, including PNC (PNC) and US Bancorp (USB). Truist (TFC) said it will maintain its current dividend. Many regional bonds exited the Fed review with smaller buffers than their major peers.
The story goes on
The bank identified by the Fed with the lowest capital buffer was Citizens Financial (CFG), a regional bank based in Rhode Island.
The company released a statement on Friday saying it would continue a $1.3 billion share buyback program, but made no announcement of a potential dividend payout.
“We are pleased that the results of the Federal Reserve’s stress test demonstrate Citizen’s strong capital position,” said John Woods, Citizens’ CFO. “Additionally, we take comfort in the fact that the results of our corporate stress tests imply a significantly lower capital requirement than the Federal Reserve’s models.”
The bank with the highest capital ratio in the Fed’s “very adverse scenario” was Charles Schwab (SCHW), one of the lenders that came under intense investor scrutiny earlier in the year, while other banks stumbled.
“With anticipated changes in regulatory expectations and capital requirements, going forward we will provide updates on our capital planning and capital management priorities as conditions and requirements evolve,” Schwab CFO Peter Crawford said on Friday.
Banks are still preparing for new higher Fed capital requirements, which will force some of them to hold even larger buffers against losses.
Those tougher rules were already in the works before several regional banks collapsed in the spring, but regulators have made it clear in the wake of these troubles that they wanted to ensure their new approach could be applied to mid-tier institutions of a similar size in the First Republic or a Silicon Valley bank, which were among the banks that failed this spring.
Both had assets of more than $200 billion at the time of their bankruptcy.
For investors, “it seems safe to hit the water after this stress test, but definitely don’t turn your back on these two more waves of regulation coming your way,” Wells Fargo banking analyst Mike Mayo told Yahoo Finance.
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