The largest US banks will learn the results of recent stress tests from the US Federal Reserve this week, with the degree of success expected to be a catalyst for billions of dollars in share buybacks and dividends.
The expectation that banks will return more money to shareholders is a sign of how much cash the US banking sector has amassed during the pandemic. The likes of Goldman Sachs and JPMorgan Chase have been boosted by government stimulus and increased revenue from trade and deal-making.
“The big banks have gone into the pandemic looking overcapitalised and after more than a year of no share repurchases, they look like too much capital,” said Jeffrey Hart, senior research analyst at Piper Sandler.
“They were buying a lot of equity before the pandemic, and now a year of capital on their balance sheets means we expect the pace of that to increase significantly,” Hart added.
The Fed limited dividends and banned share buybacks last year when the Covid-19 pandemic broke out. The central bank eased some of these restrictions at the beginning of 2021, but it still limits the amount of money banks can return to shareholders to no more than the cumulative profits of the previous four quarters.
These will be the limits pulled over Awaiting the results of the analysis and the comprehensive annual capital review, known as CCAR and the requirements of the Post-Crisis Dodd-Frank Financial Regulations. Results are due on Thursday, June 24th.
In order to “pass” the CCAR, the 23 participating banks are required to demonstrate that they have sufficient capital to overcome the streak Doomsday scenarios It shows a minimum residual capital.
These scenarios include a US stock market crash and a sharp drop in economic output. There was also a major distress scenario in commercial real estate, with the focus on the uncertainty around the pace at which companies would return to in-office work.
Through the tests, each bank’s Federal Reserve will determine how much ordinary high-quality Tier 1 capital, or CET1, is in excess of the regulatory minimum it needs to hold a so-called temporary capital reserve. The CET1 ratio, which is measured against risk-weighted assets, is an important measure of financial stability.
last year was First time The Fed took this precautionary approach to stress capital.
Once the green light is given, finding funds to give back to shareholders will no longer be a problem. American banks have more liquidity than you know what to do with it.
For JPMorgan, the largest US bank, it increased its capital pile from CET1 to $206 billion at the end of the first quarter from $184 billion a year earlier. At Goldman Sachs, CET1 capital rose over the same period to $85.2 billion from $75.55 billion, while Morgan Stanley swelled to $94.3 billion from $74.7 billion.
Banks usually aim to hold capital in excess of regulatory minimums. Analysts say the big banks have enough cash on their balance sheets to return more money to shareholders and still comfortably outperform regulatory requirements.
Buying back their shares is less effective now though it would have been when stock prices for banks like Goldman, JPMorgan and Morgan Stanley plunged in March 2020 at the start of the coronavirus pandemic. Their shares have soared since September, with many reaching all-time highs on the back of booming trading and deal-making, as well as a bright outlook for the US economy.
However, Barclays analysts estimate that the average bank out of 20 covered and stress-tested will return more than 100 percent of its profits to shareholders over the next year, with capital returning to investors approaching $200 billion.
“Whether they tell you how many shares they will buy back is irrelevant,” said Jason Goldberg, an analyst at Barclays. “They will all buy back the shares and increase the profits.”
In addition to large US banks, US subsidiaries of foreign banks with significant US investment banking operations are also subject to CCAR.
This includes Swiss bank Credit Suisse, whose controls came under scrutiny after experiencing a $5.5 billion credit loss that was extended to Bill Huang’s family office in Archegos.